How much longer?

Some questions for various old monetarists, Austrians, gold bugs, and other conservatives:

1.  Japan has had interest rates near zero for nearly 2 decades.  Is this easy money, despite an NGDP that is lower than in 1993?  Despite almost continual deflation?  Despite a stock market at less than one half of 1991 levels.  Despite almost continually falling house prices?  If it’s easy money, how much longer before the high inflation arrives?

2.  The US has had near zero interest rates for more than 5 years.  Is this easy money?  If so, how much longer until the high inflation arrives?  If rates stay near zero for 2 more years, and inflation stays low, will you still call it easy money?  How about 5 more years?  Ten more years?  Twenty?

I constantly hear conservatives complain that elderly savers can’t earn positive interest rates because of the Fed’s “easy money” policy.  Is there any time limit on how long you will make this argument, before throwing in the towel and admitting rates are low because of the slowest NGDP growth since Herbert Hoover was President?  Or is your model of the economy one where decades of excessively easy money leads to very low inflation and NGDP growth?

In other words, is there some sort of model of monetary policy and nominal interest rates that you have in your mind, or do you see easy money everywhere and tight money nowhere?  What would tight money look like?  What sort of nominal interest rates would it produce?


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267 Responses to “How much longer?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    3. March 2014 at 18:42

    Amen.

  2. Gravatar of Major_Freedom Major_Freedom
    3. March 2014 at 18:54

    Speaking from an Austrian perspective:

    1. No scientific predictions are possible for the economy, because humans learn in a priori unpredictable ways and hence act in unpredictable ways. Thus, asking Austrians when their alleged predictions will come true, is asking a question about something not derived from Austrian theory.

    2. The key issue for Austrians is not if and when price level inflation or aggregate spending changes move this way or that. The key issue is how well money is serving as a tool of economic calculation, and the corollaries of how coordinated the temporal structure of the economy is, both domestically and in a world division of labor context, and how much central bank intervention is distorting relative prices, relative spending, interest rates, and thus resource and labor allocation.

    3. It is not the case that Austrian theory is just waiting to be “vindicated” by high price level inflation or high aggregate spending. Both the supply of money and the demand for money holding are components in Austrian theory that explain spending and – given a particular production level – prices.

    4. Austrian theory holds that the capital structure of an economy becomes distorted and in need of correction to the extent that prevailing interest rates are higher or lower than what a free market would have generated, due to central bank intervention. Whether or not prevailing interest rates are higher or lower that what a free market would have generated, is something we can only guesstimate, because it is a counter-factual that cannot be observed.

    5. Perhaps most importantly, it is almost always the case that Fed inflation, whatever it is, is higher as a rule than what a free market would have generated, and so that’s why you tend to see Austrians clamouring for lower, not higher, inflation. It is to get money closer to what a free market would have. If we lived in a bizaaro world where central banks went against their own interests and the banking industry’s interests by consistently issuing less currency than what a free market would have generated, then Austrians would be tending to always be clamouring for more inflation to get money closer to a free market. Of course, in both cases it is guesswork, but Austrians generally believe that because the whole point of central banking is to enable governments and special interest groups to get their hands on more money than they otherwise could in a free market, Austrians believe it is not unreasonable to have an ongoing “austerity” attitude towards central banks.

    6. Austrians do not reason from NGDP changes, or any other aggregate changes. They reason from individual action. They reason from the categories of individual action in catallactics, such as prices, relative demands, which they put under the umbrella of “economic calculation.” Austrians argue that even though NGDP is stable, or going down, it is still possible for NGDP to be higher than what a free market would have generated, and as such, prevailing NGDP would represent the effect of a cause that is distorting the real economy in ways not related to NGDP specifically, but rather to interest rates, and relative prices and spending.

    7. To answer your questions more specifically, that is, whether there is “easy money” or “tight money” in Japan and the US, Austrians argue that the answer depends on whether or not there is more money being issued by CBs today that what private money producers would have generated today. The standard to Austrians is the free market, not NGDP growth of 5%. If MMs are permitted to reason from an absence of 5% NGDPLT, then Austrians should be permitted to reason from an absence of a free market in money.

  3. Gravatar of Major_Freedom Major_Freedom
    3. March 2014 at 18:55

    Benjamin Cole:

    Questions are “Amen”? You mean they’re rhetorical and Sumner is not really interested in knowing what he’s asking, because he already knows the answer and is just taking his readers for a ride?

  4. Gravatar of Benjamin Cole Benjamin Cole
    3. March 2014 at 18:56

    Okay, I tried to be tight-lipped, but I couldn’t do it….the “elderly savers” whimpering is wrong on so many levels…

    1. Okay, free markets—in pure free markets, there is no guarantee of returns for savers, elderly or otherwise. Savers would lose capital in free markets if there were gluts of capital (driving returns into the negative range, certainly after bank fees), or if banks failed, and private insurance didn’t cover the losses.

    An assured return for savers can only come about through central-bank backed deposit insurance and then artificially high interest rates…

    However sustained artificially high interest rates are self-immolating, in that they bring about tight money, slow economic growth, more savings and then zero lower bound….and getting stuck in ZLB land is not cured by even tighter money and higher rates…

    So, the short story is monetary policy has to be about macroeconomic growth and then a reasonable amount of price stability, not about savers or any other sacrosanct group….

    Remember that: the purpose of macroeconomic policy is economic growth.

  5. Gravatar of Benjamin Cole Benjamin Cole
    3. March 2014 at 19:04

    “Even if it is true, I still don’t believe it.”—My own Uncle Jerry.

    This describes PC-correct thinking left- or right-wing. Or Austrian. Or Keynesian.

  6. Gravatar of Benjamin Cole Benjamin Cole
    3. March 2014 at 19:10

    Major Freedom-

    Remember, in pure free markets you could lose all of your lifetime savings in a flash. I am talking the read deal, real free markets.

    If your bank failed, and if your bank did not maintain covenants of private insurance, you would be out of luck.

    If banks as a whole were effectively under-insured (or insurers undercapitalized), and banks collapsed, then you would lose your savings (the AIG scenario).

    I just would like one Austrian to own up to that reality: ‘Yes, in pure free markets my lifetime savings could be wiped out in an instant. I am willing to take that risk to have higher real economic growth.”

    “Maybe if I kept gold in a tree trunk somewhere. Even in a safety deposit box it could be stolen.”

  7. Gravatar of TravisV TravisV
    3. March 2014 at 19:17

    Major_Freedom,

    You’re too abstract. It is not persuasive to say that 0% or 1% NGDP growth is preferable to 4% NGDP growth. If U.S. NGDP growth fell to that level, then our experience would be like Japan’s.

    A more plausible argument might be that a giant deflation of 20%+ would be beneficial. The banking system would be destroyed and maybe something better would be erected in its place. I feel that it wouldn’t work out well but I can’t absolutely prove that that’s the case.

    So which course do you think is preferable: a gradual reduction of NGDP growth to 0% or 1% or a giant 20%+ deflation that destroys the banking system?

  8. Gravatar of Major_Freedom Major_Freedom
    3. March 2014 at 19:19

    Benjamin Cole:

    “Okay, free markets—in pure free markets, there is no guarantee of returns for savers, elderly or otherwise. Savers would lose capital in free markets if there were gluts of capital (driving returns into the negative range, certainly after bank fees), or if banks failed, and private insurance didn’t cover the losses.”

    1. You’re right that in a free market there is no guarantee of profits. But the question is whether people are better off in peace than they are under coercion. It is better to be guaranteed a loss for the sake of others through coercion, or is it better to prohibit coercion and thus prohibit losses coming at the expense of others?

    2. Austrians have went into great detail to show that general gluts are an impossibility, and that there can only be partial relative overproduction of capital and, an unseen partial relative underproduction of capital. This may surprise you, but just a single city could profitably absorb the entire world’s savings and investment, multiple times over, and beyond. As long as there is a desire in that city for “better, bigger and faster”, there is room for more investment.

    3. The record of central banks is worse than without central banks. On record, the top 4 worst recessions following a crisis have been with central banks. The two worst economic periods on record have come under central banks. Yes, I know you believe you finally have the key to make it all work, but remember, you are just as sure as price level targeting theorists were before it was plainly and obviously exposed as destructive. They failed to take into account individual action and economic calculation in a division of labor, and so are MMs. That is why price level targeting failed. It didn’t fail on the basis that it wasn’t NGDPLT. It failed because it wasn’t free market.

  9. Gravatar of Major_Freedom Major_Freedom
    3. March 2014 at 19:25

    TravisV:

    1. Yes, I know I am being very abstract. I would say it is a requirement to be able to reason about what happens. To know what is happening, you have to know how things otherwise could happen (in a free market in this case). That takes a lot of abstract thinking.

    2. I really didn’t come here to “persuade” for persuasion’s sake. If I only wanted to persuade, I would merely offer you what you already believe, plus just the slightest change so that it doesn’t encourage knee jerk rejection. Piecemeal like. But Austrian theory is integrated and as is. If the world is really really different from it, then it isn’t going to change. It will just start to appear as more and more radical and fringe, and thus “unpersuasive” to those who can only handle a little change at a time.

    I came here to explain the Austrian view that Sumner requested. You can’t legitimately criticize the theory for being something you don’t like. You can really only criticize it using discursive reasoning. Comparing it to other theories and believing that because it is so different, it must be rejected, is not how Austrians will accept any criticism of it.

  10. Gravatar of TravisV TravisV
    3. March 2014 at 19:32

    Major_Freedom,

    I asked a question: which course do you think is preferable: a gradual reduction of NGDP growth to 0% or 1% or a giant 20%+ deflation that destroys the banking system? You didn’t respond.

    I made the point that if the U.S. did reduce NGDP growth to 0% to 1% then our experience would be very similar to Japan’s. You didn’t respond.

  11. Gravatar of Major_Freedom Major_Freedom
    3. March 2014 at 19:39

    Benjamin Cole:

    “Remember, in pure free markets you could lose all of your lifetime savings in a flash. I am talking the read deal, real free markets.”

    Yes, you’re right. But precisely because there would be no government guarantee and bail outs, people would have a much higher incentive to planning for such unforeseen events through insurance, higher cash savings relative to spending, and so on. Austrians hold that you can’t ignore the incredibly crucial and important role of learning in human life. Austrian economics is based on individual action, and so there is a natural respect for individual reason to solve problems. Sure, if you assume that humans are generally stupid, incapable of learning, and things like that, then it is all too easy to believe that they need a coercive centralized power influencing them to be better than they are. This a very ancient dispute about mankind that goes back millennia. For me, I hold humans in general as capable of learning to deal with unexpected events, and as a result, prevent undue pain and fall out when those events occur.

    Just consider how much incentive there is for people in our society to plan against recessions and heavy losses, given that government is there to back stop, both in the form of inflation and taxing the wealthy. This should be trivial.

    “If your bank failed, and if your bank did not maintain covenants of private insurance, you would be out of luck.”

    You’re right. But that is a strength. For individuals to incur the full costs of their mistakes, provides the best opportunity from learning from one’s errors. If a person keeps making mistakes, but their mistakes are covered up, then they will not learn as well, if at all.

    “If banks as a whole were effectively under-insured (or insurers undercapitalized), and banks collapsed, then you would lose your savings (the AIG scenario).”

    All the more reason for banks to over insure in a free market!

    Can’t you see that by posing a problem you foresee, you are teaching yourself and others on ways you can deal with that problem? It’s amazing what no government does to a person’s mind.

    With government, you don’t even think of such insurance!

    “I just would like one Austrian to own up to that reality: ‘Yes, in pure free markets my lifetime savings could be wiped out in an instant. I am willing to take that risk to have higher real economic growth.””

    Let me be the first to let it be known to you: Yes, in a free market, an individual can be completely and totally wiped out.

    But remember, the same thing is true in a government hampered economy. Government and the central bank don’t bail out everyone. You personally could lose everything, and you’ll be left to not even a free market to better yourself, but a hampered market!

    “Maybe if I kept gold in a tree trunk somewhere. Even in a safety deposit box it could be stolen.”

    All the more reason to really make sure your wealth is protected.

    When you think like a free market economist, you have to always take into account that any peaceful exchange driven problems that you consider, ALWAYS have a peaceful solution. Always. There has never been a peaceful exchange driven problem that didn’t have a peaceful solution in human history. It’s up to you to accept this, and take on the responsibility of solving your own problems without benefiting from exploitation of others through government violence.

    It’s a tall order, I understand. Sometimes I wonder why the hell I even support a method of interaction that would incur me with potentially greater losses in freedom, than less losses if I could benefit through exploitation of people I have never even met.

    But I think to myself, if I would not want others to exploit me to save their skin, wouldn’t it be terribly rude and uncivilized for me to want anything different for them?

    My view is that we have to teach ourselves to respect the property rights of complete strangers. This I think makes us all better off, not in the short run, but definitely in the long run, which is where I think economic thinking is focused.

  12. Gravatar of Major_Freedom Major_Freedom
    3. March 2014 at 19:45

    Travisv:

    “I asked a question: which course do you think is preferable: a gradual reduction of NGDP growth to 0% or 1% or a giant 20%+ deflation that destroys the banking system? You didn’t respond.”

    Sorry, I missed that.

    I prefer neither.

    Question: Why do you insist on presenting me with such a limited choice, given that I and other humans have the capability of choosing other courses of action? You do know that there are other alternatives than central bank management of NGDP, right? It’s not true that we MUST choose between X NGDP and Y NGDP.

    “I made the point that if the U.S. did reduce NGDP growth to 0% to 1% then our experience would be very similar to Japan’s. You didn’t respond.”

    Sorry again.

    My solution to helping Japan is abolishing the Japanese central bank, and letting the market decide the money.

    I know and understand this is irksome and frustrating to read, but I do not accept the premise that we have to choose between those things. If we can teach more people of a better way, than our options will expand. I choose to fight in that arena of creating new options, not the arena of taking what’s given to me and choosing a horrible thing over a more horrible thing.

  13. Gravatar of TravisV TravisV
    3. March 2014 at 19:56

    Major_Freedom,

    If the U.S. implemented your scheme, there is tons and tons of evidence indicating that our experience would resemble Japan’s or worse.

    Why wouldn’t it?

  14. Gravatar of CA CA
    3. March 2014 at 20:02

    Outstanding post. Everyone needs to tweet this or post it on your Facebook.

  15. Gravatar of MichaelM MichaelM
    3. March 2014 at 20:41

    “Remember, in pure free markets you could lose all of your lifetime savings in a flash. I am talking the read deal, real free markets.”

    Can’t the same thing happen in unfree markets? HASN’T the same thing happened in unfree markets? All over the world? Multiple times?

    The fool isn’t the one who believes that money is only absolutely safe in free or unfree markets, the fool is the one who believes there is a situation where wealth is ever absolutely safe.

  16. Gravatar of Kenneth Duda Kenneth Duda
    3. March 2014 at 20:58

    Nice post, Major_Freedom.

    Scott, I spent some time with a bunch of Austrians, and what dominates their thinking is freedom. “Freedom from the visible hand” of government intervention in the economy, which would perform optimally if left alone. In the Austrian view, governments tend to create too much currency, which leads to “mal-investment”, which then leads to a bust — many of these people really believe that the 2007-8 meltdown was due to earlier money-printing inducing the private sector to make bad loans, and everything that followed was mother nature taking her revenge on all of us for thinking we could “outsmart the markets”. They find the idea that printing yet more money could somehow be the cure as utterly bizarre.

    I could only find one careful thinker in the bunch, and I’d say Major_Freedom captured his views pretty well. I tried to argue (with the one careful thinker) that sticky prices meant that it would take years of sustained output gap for prices to adjust, and thus monetary expansion is critical whenever there is a positive demand shock for the medium of account. He would not accept this, insisting that if the markets were assured that the Fed would maintain a fixed supply of base money, prices would adjust downwards much more quickly. It’s hard to argue against counterfactuals like that.

    -Ken

    Kenneth Duda
    Menlo Park, CA
    kjd at duda dot org

  17. Gravatar of Benjamin Cole Benjamin Cole
    3. March 2014 at 21:16

    Major Freedom-

    I salute you. You are the first Austrian I have met who concedes that your lifetime savings could be wiped out in a flash, in a world of pure free markets, and no FDIC (government insured deposits).

    Yes, this might lead to better private insurance. Or less capital formation.

    There are still some problems. In the real world, while the USA might go to free banking,but China might have a system of forced savings. So we might have a global glut of capital, even if the USA had low savings rates. This would lead to negative returns for savers.

    And do you allow fractional reserves in “free” banking or use the iron hand of government to outlaw freedom and the use of fractional reserves? If you are true libertarian, you have fractional reserves, if that is what people agree to.

    Moreover, human memories are short. People start to build below the high- water mark, so to speak. After one generation a few houses, then whole neighborhoods.

    The same thing happens in banking—after a collapse, it was safe-safe for a while, but then people would migrate to banks with higher rates on deposits, and remember, the banks would use every advertising slogan or gimmick or con job at disposal to get your deposits perhaps even “salesgirls” who are very friendly, or joining churches and feigning faith and the whole rot.

    Inevitably, Murphy’s Law, and the day would come when you would have unforeseeable and unintended but catastrophic economic destruction globally, with cascading disintermediation and worldwide liquidation and evaporation of all assets.

    I mean, back to spears, and hope you remember bow technology.

    That is the future with the Austrians.

  18. Gravatar of TravisV TravisV
    3. March 2014 at 21:43

    Kenneth Duda,

    Is there really much difference between some guarantee of a fixed money supply and what happened in Japan?

    No.

    The monetary policy of Japan has been tight for years and years. It really didn’t take long for markets to identify that future trend. The result was a disaster.

  19. Gravatar of Maurizio Maurizio
    4. March 2014 at 00:16

    Where can you get NGDP charts for the various countries? Thank you

  20. Gravatar of W le B W le B
    4. March 2014 at 01:24

    One reason why ‘they’ see inflation under the floor boards: their time line?

    See this explanation of the present UK Treasury View from Sir Nicholas Macpherson, permanent secretary of the Treasury, 15th Jan 2014:

    “3. Sound money.
    “It may be that I was excessively influenced by my late teenage years. It is certainly etched in my memory that prices rose 16 per cent in 1974, 24 per cent in 1975, 16 1/2 per cent in 1976 and 16 per cent in 1977. For me the provision of price stability is tantamount to a moral issue; it goes to the heart of the fundamental duties of the state. And it is for this reason I disagree with those economists who have argued in recent years that the authorities should seek to encourage consumption by generating excess inflation.”

    Note the total misunderstanding of MM.

    Source: http://blogs.independent.co.uk/2014/01/19/the-treasury-view/

    There is actually a good case for seeing the recovery in UK NGDP starting when George Osborne briefed FT journalists Chris Giles and George Parker, published 6th March 2013, ‘Osborne to Hand Carney New Powers’.

    ‘George Osborne’s Budget,’ they wrote, ‘will pave the way for Mark Carney, incoming Bank of England governor, to come to the rescue of the economy as the chancellor sets the scene for a new era of looser monetary policy.’

    The two journalists learned that options ‘include (1) giving the monetary policy committee greater time to bring inflation back to the 2 per cent target, (2) giving the BoE a Federal Reserve-style dual mandate to target both employment and inflation, and (3) even targeting cash spending in the economy rather than inflation’.

  21. Gravatar of Maurizio Maurizio
    4. March 2014 at 01:29

    @Benjamin Cole

    “in pure free markets you could lose all of your lifetime savings in a flash”

    Just diversify your investment, e.g. with a mutual fund. Problem solved. Not to count the innumerable ways that would develop in a free market to avoid that problem.

  22. Gravatar of Joe Eagar Joe Eagar
    4. March 2014 at 02:02

    Major_Freedom, so basically you believe in a central bank-centered theory of financial imbalances, as opposed to the more normal fiscal-centered one.

    I think you’re giving the central bank too much credit for determining capital flows. Bubbles attract foreign capital, which *feed off* higher interest rates (foreign savers tend to increase their lending faster then domestic savers increase their saving). The central bank is effectively powerless in this situation, especially if the underlying problem is reckless fiscal policy.

  23. Gravatar of Joe Eagar Joe Eagar
    4. March 2014 at 02:04

    I forgot the “?” at the end of the first paragraph in the last comment. That’s supposed to be a question, not a statement.

  24. Gravatar of foosion foosion
    4. March 2014 at 02:21

    >>I constantly hear conservatives complain that elderly savers can’t earn positive interest rates because of the Fed’s “easy money” policy. >>

    In the US, Social Security is much much more important to the vast majority of elderly than portfolio income.

    Sensible portfolio policy is to diversify, so they should own some stocks, which have done well recently.

    If the model is easy money increases NGDP, then there’s enough for everyone to be better off, either directly or through redistribution. Many have no trouble supporting trade policies that make some worse off, on the theory it makes the aggregate better off.

  25. Gravatar of Maurizio Maurizio
    4. March 2014 at 02:34

    “If so, how much longer until the high inflation arrives? If rates stay near zero for 2 more years, and inflation stays low, will you still call it easy money?”

    It sounds like you don’t think inflation will ever arrive, even if a lot money has been printed. If you believe that, why? You expect demand for money to stay low forever? Or you expect a lot more goods to be produced? Thanks.

  26. Gravatar of Maurizio Maurizio
    4. March 2014 at 02:34

    “If so, how much longer until the high inflation arrives? If rates stay near zero for 2 more years, and inflation stays low, will you still call it easy money?”

    It sounds like you don’t think inflation will ever arrive, even if a lot money has been printed. If you believe that, why? You expect demand for money to stay high forever? Or you expect a lot more goods to be produced? Thanks.

  27. Gravatar of Benjamin Cole Benjamin Cole
    4. March 2014 at 03:13

    Maurizio:

    Yes…to an extent. Diversification works. But….

    1. Private diversifiers could go bankrupt or lose value, using your money. In other words you were in a “balanced” mutual fund, but it went down in value.

    2. When you have a global banking collapse, which assets would hold their value? Not equities or properties—maybe government gilts. Yes, you can set options over-ride and short programs, but if maintained consistently they reduce returns.

    3. We have seen that almost no professional money managers outperform the market on a sustained basis. So, if in free markets you have general market declines, then you have losses for equity investors. Most likely you would have losses for savers too, when loans went sour in excess of the ability of the private sector o insure loans or assets. The AIG scenario again.

    My only point is, there is not sacrosanct and guaranteed returns for savers in free markets. They could very well lose money, serious chunks of it, in any free market scenario, even if they diversify and avoid risk. If they seek any sort of return, they could lose all their savings quickly. Life is tough and then you die in free markets.

    The only way to guarantee savers get a return is deposit insurance backed by a central bank (unlimited ability to bail out banks) and then some sort of rigged, artificially high or subsidized rates. That or TIPS bonds issued by the government, same idea.

    It may be fee banking works better than a system using the backstop of a central bank. But be honest—a free market system has the possibility for catastrophic and cascading failures, and savers could lose large fractions of their savings very quickly. Disintermediation would would result in growing fireballs of financial destruction. And once that happened, likely people would not trust financial institutions gain.

    Learn how to spear-hunt and dig tubers.

  28. Gravatar of marcus nunes marcus nunes
    4. March 2014 at 04:44

    An illustration of the “monetary stance”:
    http://thefaintofheart.wordpress.com/2014/03/01/identifying-the-stance-of-monetary-policy/

  29. Gravatar of Willy2 Willy2
    4. March 2014 at 05:55

    No, short term interest rates very close to zero is the result of decisions made by Mr. Market. And the FED always follows Mr. Market.

    The Austrians are in that regard simply “way off the mark” by thinking those low rates are the result of machinations of the FED.

  30. Gravatar of Roger Sparks Roger Sparks
    4. March 2014 at 06:51

    I am thinking about a lost penny, laying on a city street.

    Some people look at the penny and walk by. Other people will pick up the penny. What is the ratio of walk-by-ers to pick-up-ers?

    I would suggest the ratio is dependent upon three parameters:

    1. The need each person has for the penny.

    2. The density of the pennies. People are more likely to pickup two pennies laying close together than a single penny.

    3. The waste-recovery (or property) rules of the population.

    Now, if we apply these three parameters to macroeconomics, easy-money may not overbalance the money handling rules of the economy. Money may be easy to get but the results of possession may not be worth the effort needed to manage the acquired money.

    The lesson here is that rules can be more important than “easy money” or “tight money”.

  31. Gravatar of TravisV TravisV
    4. March 2014 at 06:52

    Major_Freedom,

    If the U.S. implemented your preferred scheme, there is tons and tons of evidence indicating that our experience would resemble Japan’s or worse.

    Why wouldn’t it?

  32. Gravatar of John Becker John Becker
    4. March 2014 at 06:56

    Scott,

    Based on the above, how much longer until you admit that monetary policy doesn’t work? Cutting interest rates and then buying assets when you hit zero doesn’t work. I don’t think any Austrian would argue that it would. (Market) Monetarists on the other hand…

  33. Gravatar of Daniel Daniel
    4. March 2014 at 07:17

    how much longer until you admit that monetary policy doesn’t work?

    So now austrians are saying that printing money DOESN’T cause inflation ?

    I’m confused.

  34. Gravatar of Mark Mark
    4. March 2014 at 08:29

    Love it when the Austrians come out to play.

  35. Gravatar of Gregor Bush Gregor Bush
    4. March 2014 at 08:30

    Scott,
    I thought you’d be familiar with this metaphor from the Cleveland Fed website:

    http://www.clevelandfed.org/research/commentary/2014/2014-02.cfm

    “To this version of the rule, we add employment growth. This variable allows us to capture the change in the pace of real economic activity. The following metaphor may explain why it improves the rule’s accuracy. Think of the FOMC setting the target fed funds rate as the captain who is guiding a ship to the dock. The decision to increase or decrease the engine speed (interest rates) is affected both by the ship’s current location (unemployment rate) and its speed (employment growth).”

  36. Gravatar of Liberal Roman Liberal Roman
    4. March 2014 at 09:13

    Love this post.

    Scott, their model is same as doomsday prophet. Never admit you are wrong. Always say doomsday is just around the corner.

    Actually I should apologize to doomsday prophets. At least they set a date for doomsday. The Austrians never admit they are wrong. There are YouTube videos of Ron Paul in the 1980s sounding exactly like Ron Paul in 2014. Same predictions of hyper-inflation of just around the corner.

  37. Gravatar of Dan W. Dan W.
    4. March 2014 at 09:52

    Scott,

    You should know better than to trust an Austrian to make monetary predictions. Austrians already know not to trust a monetarist to make economic predictions. And a wise person would take with a grain of salt any economic predictions anyone makes.

  38. Gravatar of John Becker John Becker
    4. March 2014 at 09:56

    I’m saying that cutting rates and buying assets (the same thing really) on the part of the central bank does not spur economic recovery. As a result of the efforts of the BOJ and Fed, I would argue (especially in America) that prices are higher today than they would have been had the banks not done their asset purchase programs. The price most affected by the asset purchases was the price of bonds (inverse of interest rates). I think prices would have fallen sharply in 2009 in the U.S. or circa 1992 in Japan and that this would have been a healthy response.

  39. Gravatar of Scott Freelander Scott Freelander
    4. March 2014 at 11:18

    Scott,

    Sadly, as you’ve aptly pointed out, fellow liberals like Krugman, Stiglitz, etc. are just as lost on many questions as Cochrane and many others at Chicago. Most economists of virtually any stripe are politically and theoretically ideologically locked-in to ludicrous perspectives that often are obviously not even internally consistent.

    Most economists are either fixated on the zero lower bound, or claim that high inflation is virtually guaranteed in the future. Some others actually claim that inflation has no real effects.

    Most also either support fiscal stimulus, while ignoring monetary offset, or claim that fiscal stimulus never works and can’t even work conceptually.

    That’s what’s great about market monetarism. It isn’t ideological and just focuses on evidence.

    Scott,I appreciate your non-ideological nature more all the time.

  40. Gravatar of TallDave TallDave
    4. March 2014 at 12:27

    I keep telling our conservative friends, they are losing the argument to the fiscal expansionists because their own preferred models are even more wrong. If they accept MM they can win elections and have a better economy.

    MF –

    1. If a theory makes no testable predictions at all, it is not a theory. Anyways, you’ve described several predictions.

    2. True, but that doesn’t describe a preferred path. Even Austrians would generally predict disaster from a path of negative 10% inflation.

    3. Tell that to the Austrians who keep predicting it.

    4-5. I think it’s fine to assume the ideal is a free banking system, but I don’t think it makes sense to assume you can know what the free market would do — that smacks of the Fatal Conceit.

    “If we lived in a bizaaro world where central banks went against their own interests and the banking industry’s interests by consistently issuing less currency than what a free market would have generated” is often the actual world we live in, certainly in TGD if not today. (Indeed, local concerns started issuing their own scrip!)

    6. I agree, but I think you’ve identified the problem in 4-5: its impossible (virtually by definition) to know what a free banking system would have done. We can occasionally get some clues (e.g. from free-market scrip production) but Austrians generally seem to be awfully sure money was not too tight in 2008-9 simply because the Fed exists. Free bankers could have been more aggressive, rather than less, for instance setting better forward guidance.

    7. That’s really the same question though — would free bankers try to maximize RGDP? Well, then, they probably would have figured out MM decades ago!

  41. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 12:32

    TravisV:

    “If the U.S. implemented your scheme, there is tons and tons of evidence indicating that our experience would resemble Japan’s or worse.”

    But I’m not calling for Japan’s scheme. I’m calling for a complete and total privatization of money.

    The fact that Japan has had average real growth since 1991, doesn’t mean the theory that more inflation would have made everyone better off is true. Did other more inflationary economies benefit at the expense of a portion of Japan’s population? Is Japan now benefiting at the expense of a pprtion of other countries now that it is more inflationary? Did the high inflation created errors pre-1991 get corrected post-1991? Did the massive bubble and burst back in the late 1980s put the Japanese economy on a permanently, or very long term, lower real growth capacity?

    Austrians argue that spending is the result of real activity. At root, people trade money because they ultimately want goods. If NGDP rises due to inflation, then the proximate cause is still real activity. But not all equal NGDPs have equal real activity, natch.

    Perhaps what we had seen in Japan for the litle over 20 years post-1991 is Japan’s sustainable real growth rate.

    We can’t know for sure either way unless we have access to the requisite information that only free market prices can convey.

    High growth rates do not necessarily imply they are always desirable. Not if it can’t last on the basis that the growth is due in part to investors being misled as to what the true savings rate of the population really is.

    Austrians argue that empirical evidence can only tell us what people knew and what people did in the past. It does not necessarily show us what must happen in the future, because the future is based on future knowledge and actions.

  42. Gravatar of TravisV TravisV
    4. March 2014 at 13:12

    Major_Freedom,

    I think that tight money has done grave harm to the Japanese economy. I actually agree with David Glasner that “Money Is Always* and Everywhere* Non-Neutral”

    http://uneasymoney.com/2012/06/19/money-is-always-and-everywhere-non-neutral

    That said, the key big-picture point is Friedman’s lesson about the Great Depression: tight money does not result in free-market awesomeness. In fact, it’s just the opposite: tight money leads to big, corrupt, wasteful government. Japan is an incredibly statist place. Here is a picture of the policies that would begin to emerge in the U.S. if we adopted your monetary recommendations:

    http://noahpinionblog.blogspot.com/2013/08/the-neoliberal-choice.html

  43. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 13:15

    Kenneth Duda:

    “I tried to argue (with the one careful thinker) that sticky prices meant that it would take years of sustained output gap for prices to adjust, and thus monetary expansion is critical whenever there is a positive demand shock for the medium of account. He would not accept this, insisting that if the markets were assured that the Fed would maintain a fixed supply of base money, prices would adjust downwards much more quickly. It’s hard to argue against counterfactuals like that.”

    You are absolutely right. GIVEN wages are sticky, then inflation can result in nominal demand for labor rising which will of course reduce unemployment that is present because of a difference between quantity of labor demanded at prevailing wage rates and quantity of labor supplied. This is a mathematical relation and indisputible.

    HOWEVER…

    Wage stickiness is not an immutable given. We don’t have to have undue wage stickiness forever. Some should be tolerable, since it takes time to learn, reassess, and adapt in the constantly changing world of individual preferences. It would not be reasonable to want zero stickiness, i.e. instant wage rate adjustments.

    We can analyze the causes of wage stickiness in addition to planning for and bringing about a free market. Now, I don’t speak for “Austrians” on the following specific points, but I hold that wage stickiness is a problem that can be solved by education. Well, that may be Austrian I don’t know.

    But anyway, education can solve this problem. What ideas are standing in the way? I don’t want to take the lazy way out and dismiss the average person as “suffering” from some irreparable “illusion.” Assuming average people are stupid undercuts any argument for social change that requires the mass of the population.

    So what ideas are hampering wage flexibility? Karl Marx and JM Keynes bear the greatest responsibility, intellectually speaking.

    With Marx, most wage earners feel cheated and exploited if they are presented with a lower wage rate offer than the recent past. Most will assume “Greedy capitalist trying to make more profits. We’ll show him!” This has contributed to even employers being reluctant to cut wage rates sufficiently. Fear of unions, government threats, guilt, other worker resentment, public backlash…

    With JM Keynes, most workers believe they benefit others by consuming more for themselves as a result of higher wage payments. This intellectual poison has infected market monetarism as well. The government has imposed a minimum wage floor, it has imposed exploitative wealth redistribution that rewards reluctant wage earners from adapting.

    Another powerful psychological component is that caused by inflation itself, the very workaround being proposed to avoid the consequences of stick wage rates. Inflation has engrained in most people’s minds that their standard of living improves when they make more money, rather than the truth, which is that it improves on the basis of a rise in the productivity of labor exclusively, which is actually associated with falling prices, ceteris paribus. Thus, even if for whatever reason production increased and prices and wage rates fell, most workers would believe they’re worse off, or not better off, or not much better off.

    All these problems can be solved by education, which would also require a free market so governments can’t influence what is taught by taxing peoppe and paying teachers and economists to teach not what is truw, or the best that we know, but the kind of half-truths that benefit the political class and special interest groups.

  44. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 13:56

    Benjamin Cole:

    “I salute you. You are the first Austrian I have met who concedes that your lifetime savings could be wiped out in a flash, in a world of pure free markets, and no FDIC (government insured deposits).”

    Could yes, but that does not mean you must. If people are smart enough to vote in a government who will have FDIC, then people are capabile of solving the same problem peacefully, through such things as planning for a higher ratio of cash to total assets as valued in money.

    Also, FDIC would be clearly percieved as unnecessary because free market banks would not be able to expand credit like they can now. No explicit or implicit backstops nor protected “bank holidays”, as what occurred during the 19th century, and up to today.

    “Yes, this might lead to better private insurance. Or less capital formation.”

    “There are still some problems. In the real world, while the USA might go to free banking,but China might have a system of forced savings. So we might have a global glut of capital, even if the USA had low savings rates. This would lead to negative returns for savers.”

    Actually, people in a free market society would be materially better off even if they are unilaterally free market while the rest of the world is hampered or socialist.

    The right way to approach this is to understand that the free market population is worse off because other countries are not free market, not that it itself would be better off abandoning a free market like other economies.

    I could show you this in more detail, but it is a very long explanation.

    “And do you allow fractional reserves in “free” banking or use the iron hand of government to outlaw freedom and the use of fractional reserves? If you are true libertarian, you have fractional reserves, if that is what people agree to.”

    Sure, let people do what they want…

    HOWEVER…

    They could not misrepresent what they are selling. For example, a demand deposit holder at a fractional reserve bank cannot present a transferable claim to a buyer to be something it’s not, for example something other than a credit instrument. Also, people on the banking side could not misrepresent what it is they are offering. They did a study in the UK about 10 or so years ago, and they found that over half of all demand depositors believed they, not the banks, were the owners of the money deposited.

    Again, this problem can be solved with education, not violence. Violence in this aspect of society has reduced the incentive to educate.

    “Moreover, human memories are short. People start to build below the high- water mark, so to speak. After one generation a few houses, then whole neighborhoods.”

    Short term thinking in the public is based on short term philosophy prevailing in academia. Violence from government, which is itself based on violent ideas in philosophy and academia, has *drastically* reduced the incentive to think and plan for the long term. Economically, large persistent government deficits has resulted in raising the rate of profit in our economy, which has encouraged and rewarded businessmen and investors to focus more on short term profits and planning.

    “The same thing happens in banking—after a collapse, it was safe-safe for a while, but then people would migrate to banks with higher rates on deposits, and remember, the banks would use every advertising slogan or gimmick or con job at disposal to get your deposits perhaps even “salesgirls” who are very friendly, or joining churches and feigning faith and the whole rot.”

    Problem can be solved by education.

    “Inevitably, Murphy’s Law, and the day would come when you would have unforeseeable and unintended but catastrophic economic destruction globally, with cascading disintermediation and worldwide liquidation and evaporation of all assets.”

    No, there be fire and brimestone, as well as total war and apocalypse. It is quite likely the human race will go extinct if there were no initiations of violence.

    People are helpless and stupid, and so they need a government made up of people are helpless and stupid, so they need a government made up of people are helpless and stupid…

    “I mean, back to spears, and hope you remember bow technology.”

    More like stones and clubs. We’re talking protruding brow, hairy back, knuckle dragging devolution here.

    “That is the future with the Austrians.”

    You paint much too optimistic a picture. Even thw cavemen had food and shelter! Without mommy and daddy government, we wouldn’t even know how to build the roads that go to the farms! Wait, what farms?

  45. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 14:07

    TravisV:

    If money were always and everywhere neutral, then it would not even be a money. A neutral money is a contradiction in terms.

    Nor would it make sense to say that we need more of what’s always and everywhere neutral.

    Monetary conditions in Japan should always be put in a context of previous monetary conditions, as well as a free market counter-factual. More inflation now doesn’t solve the problems caused by too much inflation in the past, where “too much” can *include 1% NGDP growth*.

    Money could very well be extremely loose in Japan, if a free market would have generated a lot less. In a world market, it is absurd to expect equal growths of NGDP in each country, just like it is absurd to expect equal rates of nominal demand growth for every company in a particular country. This is true for floating exchange rate inflationary countries as well.

  46. Gravatar of Tom Brown Tom Brown
    4. March 2014 at 14:13

    Scott, interesting post.

    O/T: Nick Rowe writes: “…when we talk about AD, we are really talking about the excess demand and excess supply of the medium of exchange.”

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/03/keynes-new-keynesians-and-the-keynesian-cross.html?cid=6a00d83451688169e201a3fccbe576970b#comment-6a00d83451688169e201a3fccbe576970b

    Agree? Disagree? (my guess is disagree, because you’d replace MOE with MOA, but I don’t know for certain).

  47. Gravatar of TravisV TravisV
    4. March 2014 at 14:17

    Major_Freedom,

    If we followed your recommendation and tightened the money supply, we’d get bigger, more inefficient government. Look at what happened in the U.S. in the 1930′s. Look at what Japan is like today:

    http://noahpinionblog.blogspot.com/2013/08/the-neoliberal-choice.html

    Milton Friedman, Sumner and TallDave are right. They are true advocates of smaller government. You aren’t.

  48. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 14:23

    TallDave:

    You said that a claimed theory that isn’t a prediction, isn’t a valid theory.

    OK, then what about that theory on what allegedly constitutes valid theories? Is what you said a prediction? If not, then why do you regard it as saying something true about the world?

    Not all true statements of how things are, requires such statemwnts to be in the form of a falsifiable prediction only. Austrian theory is a theory of how we come to know economic propositions. It tells us how and what the laws of economic categories such as the law of marginal utility are known.

    The belief that all knowledge of the world must be in the form of testable hypotheses, is, upon reflection, a self contradictory belief.

    You’re right, we can’t know for sure now how a free market would look like. But guess what? There is no argument that a positivist can make against us trying a frew market out, because the positivist would, according to his own premises, lack valid knowledge about what he has not yet tested via experience!

    All consistent positivists must accept this, or else they would betray their own professed rightful approach. Of course not all postivists practise what they preach. Most of them have strong convictions not derived from testing.

  49. Gravatar of Tom Brown Tom Brown
    4. March 2014 at 14:56

    O/T: for anybody: quick question about the long term neutrality of money. The basic idea is that if M changes by a factor of F, then in the long term P should go to F*P all else being equal, correct? But what is M? Can we say that M is the quantity of medium of account (MOA)? Thanks.

  50. Gravatar of W. Peden W. Peden
    4. March 2014 at 15:42

    Tom Brown,

    It will depend on the person using the term “money”. Scott Sumner thinks that the most useful definition of M is the MoA. Nick Rowe and Robert Lucas think that it’s the MoE. Milton Friedman and Friedrich Hayek tended towards an adjectival view, where different assets have different degrees of “moneyness”, to use Hayek’s phrase.

    In the US, the MoA would naturally be the monetary base; the MoE is probably best measured by Adjusted M1; William A. Barnett argues persuasively that broad Divisia aggregates are the best measure of moneyness (though he doesn’t use that phrase, IIRC) as a varying property of different assets at different points in time.

    Thus one can quite consistently believe that some measures of money are neutral/superneutral/non-neutral, and that other measures are otherwise. It’s an empirical question.

    I think it was Irving Fisher who put the neutrality of money hypothesis this way: an increase in the quantity of money does not result in an equilibrium fall in the rate of interest, and so a change in the level of the quantity of money does not change the level of real output, but only the price level. (‘Level’ being an important term here.)

  51. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 15:49

    TravisV:

    While Friedman, Sumner and TallDave might believe they are “for” smaller government, I know that the having monopoly control over money, if they are against smaller government in money, then they are not just “for” bigger government than me, but big in the absolute sense as well.

    You just can’t want the goverment to have a monopoly over money which by the way it can create virtually out of thin air, and then expect it to stay small. For if the idea is accepted that initiating violence is a moral good in money, then no serious and consistent argument can be made against it increasing its violence just a little more, and then a little more, causing problems along the way while duty-bound and obedient intellectuals call for even more government to solve.

    I am for smaller government than all three of those gentlemen, both in theory and in terms of the practical outcome of theory. Indeed, I am for precisely zero government. You can’t get smaller government than that.

    I understand that what I say makes some of the “small government” folks here feel like ruthless socialists. And in a certain sense they are. It takes a ruthless ideology to CALL for government initiations of violence *for any reason whatever, including helping the poor*.

    But please don’t try to pull the wool over my eyes and claim that wanting a free market in everything makes me for bigger government than those who not only want government, but government money, government welfare, and government education. I cannot help but roll my eyes over that ridiculousness.

  52. Gravatar of Tom Brown Tom Brown
    4. March 2014 at 16:36

    W. Peden, thanks for your thoughtful response. I’m aware that Rowe and Sumner don’t agree completely on MOE and MOA, however, I had the impression (perhaps wrong!) that regarding long term neutrality they were on the same page: that it’s all about MOA.

    A little more evidence why I think Rowe might be on board with using only MOA for neutrality purposes: recently I asked him a question… he misunderstood the question, but that’s fine, the question he thought he was answering was this:

    Cashless society, Reserves at $1, Deposits at $10. CB takes over the banking sector, what happens?

    Rowe said that M goes up by 10x, and thus supply does too, but he said demand also goes up by 10x in this case, thus P doesn’t change long term. I *think* Glasner, Sumner and Sadowski are in agreement w/ that interpretation.

    If Rowe had been insisting that for purposes of monetary neutrality M was both MOA and MOE, then he would have said M went down from $11 to $10 right? Since reserves are both MOA and MOE and bank deposits are only MOE.

    Put in more general terms, if we start out with R reserves, D deposits, and the CB takes over banking, then it seems that MOA has changed from R to D (recall a cashless society). But long term prices don’t go from P to P*D/R because there’s been a demand transference between non-MOA bank deposits and MOA CB-deposits. I’m using “MOA” because “base money” was problematic in my discussions w/ Sadowski: however both Sadowski & Sumner (& implicitly Rowe & Glasner) agree that reserves go away and the closest thing left to money are CB-deposits, thus they take that role (after the CB takes over). We didn’t specifically use the term “MOA” but I’m using it now because I’m hoping it’s terminology that Sadowski, Sumner, and Rowe can all agree on.

    What I’m really getting at is that whatever “money” means in “long term neutrality of money” … it’s quantity seems to have changed after the CB takes over, but it doesn’t have an effect on P in this case because of what I’ll call “demand transference” (i.e. the concept that Rowe & Glasner outlined: in which the demand for bank deposits is simply transferred to a demand for CB deposits).

  53. Gravatar of Tom Brown Tom Brown
    4. March 2014 at 16:44

    BTW, regarding Rowe and Sumner’s differences on MOA and MOE, my first question to Scott in this post is about a recent Rowe statement that I’m guessing Scott won’t agree with (because of their differences). We’ll see! If Scott doesn’t agree I’d like to see what he’d replace it with.

  54. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 16:59

    Bernanke speaks:

    http://uk.reuters.com/article/2014/03/04/uk-usa-bernanke-speech-idUKBREA2311420140304

    He also said he found it hard to find the right way to communicate with investors when every word was closely scrutinised.

    “That was actually very hard for me to get adjusted to that situation where your words have such effect. I came from the academic background and I was used to making hypothetical examples and … I learned I can’t do that because the markets do not understand hypotheticals.”

    Well that is a double middle finger to this blog. One, because it means the often-quoted-on-this-blog statement from Bernanke in 2003 about NGDP targeting could very well have been merely a hypothetical, and that it was misconstrued as something else. Two, because Bernanke just threw the also oft-stated-on-this-blog expression “The market is the most right” under the bus.

    Bernanke also said that “overconfidence” was the cause of the financial crisis. He seems to still be in denial about the actual cause: the boom he and the Fed fuelled.

  55. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2014 at 17:24

    Scott,
    (Sort of) off Topic.

    A commenter named Marko makes an interesting claim at Mike Sax’s blog.

    http://diaryofarepublicanhater.blogspot.com/2014/03/monetary-offset-and-japans-lost-decade.html?showComment=1393903615695#c188937595587234672

    Marko:
    “Sumner and his slobbering sycophants love to pretend that their claims are based on empirical data. If so , they should be willing to concede that Koo’s ‘balance sheet recession’ idea has merit , since there’s plenty of data to support it , and more arriving all the time as this crisis claims new victims.

    Arcand finds that growth slows when credit to the private sector exceeds ~ 100% of gdp :

    https://www.imf.org/external/pubs/ft/wp/2012/wp12161.pdf

    Earlier , Cecchetti found that the threshold for the corporate sector was ~ 90% and that for the household sector ~ 85%.

    https://www.bis.org/publ/othp16.pdf

    Of course , when debt/gdp levels go up , the size of the financial sector relative to the overall economy tends to rise as well. Several studies have shown negative effects on growth when financialization becomes excessive , e.g. , Cechetti again :

    http://www.bis.org/publ/work381.pdf

    also :

    http://economics.ucsc.edu/research/downloads/Finance%20and%20Economic%20Development_LS.pdf

    These empirical studies won’t convince the MMs , naturally. They’ll say : ” What about Canada and Australia ? They have high debt , too. ” Then when subsequent growth data shows that those countries suffered from the debt overhang as well , the MMS will scrounge around to find some other outlier to cling to.

    When your goal is to justify and maintain a status quo that works to your benefit , data don’t matter.”

    Let’s take a closer look at these papers.

    1) Arcand, Berkes and Panizza (2012)
    Arcand et al uses “claims on private sector by deposit money banks and other financial institutions” (as a percent of GDP) as their measure of private sector credit. The source of the data is a set developed by Beck et al which can be found here:

    http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20696167~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html

    2) Cecchetti, Mohanty and Zampolli (2011)
    Household and corporate debt levels are described in the tables in Appendix 2. Note that Japan’s household debt levels are never more than 87% of GDP for the years reported. Household sector debt in Japan is relatively low for an advanced nation.

    3) Cecchetti and Kharroubi (2012)
    Graph 4 shows that Japan’s financial sector share in total employment is below the threshold level. Cecchetti and Kharroubi use two World Bank variables as their measure of “finance”: 1) Private Credit, and 2) Private Credit by Banks. Private Credit refers to what the World Bank calls “domestic credit to private sector” and can be found here:

    http://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS

    Private Credit by Banks refers to what the World Bank calls “domestic credit provided by banking sector” and can be found here:

    http://data.worldbank.org/indicator/FS.AST.DOMS.GD.ZS/countries/1W?display=default

    Note that Private Credit by Banks is something of a misnomer since it includes banking sector credit extended to the government sector.

    4) Nirvikar Singh
    Singh uses three World Bank variables as his measure of “financial development”: 1) Private Sector Credit, 2) Liquid Liabilities and 3) Domestic Credit. Private Sector Credit refers to what the World Bank calls “domestic credit to private sector”. Liquid liabilities are also known as M3. They are a measure of broad money supply and can be found here:

    http://data.worldbank.org/indicator/FS.LBL.LIQU.GD.ZS

    Domestic Credit refers to what the World Bank calls “domestic credit provided by banking sector”.

    Now, let’s to get to the point.

    The ratio of M3 to GDP is known by another name when one inverts it, and that is the velocity of money. The velocity of money is well known to be strongly correlated to interest rates and inflation as well as the rate of change in NGDP. By finding that there is a threshold level for M3 above which RGDP growth is adversely affected also suggests that there is a threshold level for inflation and NGDP growth below which RGDP growth is adversely affected. This is not a result that would be at all surprising to MM.

    Moreover there are strong correlations between M3 and the other three measures of “finance”. In particular, using the Beck et al dataset for M3 (the World Bank only has complete M3 for about 40 nations):

    1) The R-squared between M3 and “claims on private sector by deposit money banks and other financial institutions” in Japan from 1961 through 2011 is 95.8%.
    2) The R-squared between M3 and “claims on private sector by deposit money banks and other financial institutions” for 148 nations in 2011 is 67.2%.
    3) The R-squared between M3 and “domestic credit to private sector” in Japan from 1961 through 2011 is 94.4%.
    4) The R-squared between M3 and “domestic credit to private sector” for 155 nations in 2011 is 63.7%.
    5) The R-squared between M3 and “domestic credit to provided by banking sector” in Japan from 1961 through 2011 is 96.8%.
    6) The R-squared between M3 and “domestic credit to private sector” for 155 nations in 2011 is 62.3%.

    Needless to say, all of these relationships are statistically significant at the 1% level.

    The bottom line is high levels of “finance” are correlated with low levels of money velocity and tight money.

  56. Gravatar of ssumner ssumner
    4. March 2014 at 18:14

    Did any commenters actually answer my questions? Did any tell me how many years it would take before they decided that money wasn’t easy, but in fact was tight? There are so many comments I may have missed the answer.

  57. Gravatar of Major_Freedom Major_Freedom
    4. March 2014 at 19:56

    “Did any tell me how many years it would take before they decided that money wasn’t easy, but in fact was tight?”

    Oh sorry, I thought you were serious.

    The answer according my crystal ball that assumes no monetary changes in the future and/or assumes the ability to predict what the Fed will do in the future:

    4.2648253748352 years. At that precise moment in time, the stars will align and ye shall know the power of cosmic gleaning.

  58. Gravatar of Jan M Jan M
    4. March 2014 at 21:04

    @ssumner
    “Did any commenters actually answer my questions?”
    I’ll try one question.

    “The US has had near zero interest rates for more than 5 years. Is this easy money? If so, how much longer until the high inflation arrives?”

    The US Stock market looks pretty inflated to me. Other stock markets in Europa, too. The same thing goes for real estate markets in regions/countries like Scandinavia, Canada, Germany, Switzerland. Not to mention some BRIC states.

    I really like your blog but so far I never understood why asset price inflations and/or huge capital flows in other countries never seem to count as relevant at all. Why ist that?

  59. Gravatar of Benjamin Cole Benjamin Cole
    4. March 2014 at 21:20

    Did any commenters actually answer my questions? Did any tell me how many years it would take before they decided that money wasn’t easy, but in fact was tight? There are so many comments I may have missed the answer.–Scott Sumner.

    Scott Sumner? Who invited you to the party? We are talking about worldwide cascading disintermediation and global financial fireballs here, the big stuff.

    To answer your question, I do not need any time. I think money is tight, has been tight since at least 2008, and maybe has been a little bit too tight for 20 years, not just in the USA, but in the Western world.

    The Western world is approaching ZLB, and getting out of ZLB may be harder than we think, if Japan is a clue.

  60. Gravatar of miami vice miami vice
    4. March 2014 at 21:33

    Ok Sumner,
    You’re the fed chairman. What would easy monetary policy be and how would you implement it? and please refrain from the uninformative “faster ngdp means easy monetary policy” since there’s no information contained in stuff like that. Also please don’t say things like “if the central bank bought up everything on earth” since that ignores the rules by which most monetary authorities operate. Please don’t suggest that when people sell bonds to the feds all of a sudden they have to get rid of it by consumption since, “hot potato”.

    I mean real things you would do. Easy money. Not half finished ideas about some ngdp futures market. What would you do tomorrow as fed chair?

  61. Gravatar of W le B W le B
    5. March 2014 at 01:27

    My comment may have been eliptical but it was to the effect that we may have to wait until the generation who were in their twenties in the Great Inflation retire from their positions of power and influence, and of teaching. They can never admit that they got it wrong.

    See my quote above from the present Permanent Sec of the UK Treasury

    An important thing to do from now on is to ensure that those who ‘get it’ are the most influential historians of the period.

    Look how the dominant immediate reading of the Great Depression ignored the role of monetary policy both as a cause and as a solution.

    That is not to say that the job of ‘winning’ the argument for today’s policy can be relaxed. Today is the 5th anniversary of the UK policy rate hitting 0.5% and the hawks are dominating the studios with talk why the rate needs to rise.

    There is not a single MMer on mainstream media.

  62. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 02:38

    I have more than 30 good explanations for how inflation gets out of control. Do you agree/disagree with any of these? You do agree that sometimes inflation gets out of control, right?

    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

  63. Gravatar of Daniel Daniel
    5. March 2014 at 04:57

    JohnB

    I’m saying that cutting rates and buying assets (the same thing really) on the part of the central bank does not spur economic recovery.

    Except when it does. Oh, what I am saying. You can’t hope to persuade an austrian with facts, since facts have no place in their theory.

    I think prices would have fallen sharply in 2009 in the U.S. or circa 1992 in Japan and that this would have been a healthy response.

    Because a deflationary death spiral is a healthy response.

    Facepalm.

  64. Gravatar of Roger Sparks Roger Sparks
    5. March 2014 at 05:49

    “………….they decided that money wasn’t easy, but in fact was tight? ………..”

    Money is tight for some, ultra loose for others.

    If you are depending upon interest from your savings, times of low interest rates will forever be times of “easy money”.

    If you are buying a car, money is not tight at all.

    If you are considering buying a factory, money might be a little tighter.

    If you are considering buying a house, money is both tight and loose. You need a large down payment (tight) but interest rates are low (loose). You also need a steady job (tight).

    So Scott, you will never get agreement on whether money is tight or loose; it all depends upon perspective.

    From my perspective, money is loose but RULES are tight.

  65. Gravatar of Willy2 Willy2
    5. March 2014 at 06:19

    Reply to the 2 questions:
    1. Interest rates being so low means that there’s a very low demand for capital. The FED or BoJ DO NOT determine interest rates (both short term & long term).
    This “Easy money” already has led to A LOT OF inflation. A LOT OF speculation has been fueled by borrowing yen & go long stocks from 2009 up to now.
    In 2007 & 2008 this “Easy money” pushed commodity prices through the roof. Oil doubled from 2001 up to mid 2008. Remember ?
    In one regard I agree with the Austrian: Lower interest rates lead to more mis-allocations of capital/resources.
    2. See above.

    A LOT OF folks conflate rising interest rates with (rising) inflation. These are NOT correlated. See the 2000s. Price inflation went through the roof from 2001 up to mid 2008. E.g. oil doubled from $ 20 to $ 140. Yet interest rates went from ~6% down to ~ 4.5% in mid 2008.

  66. Gravatar of Dan W. Dan W.
    5. March 2014 at 06:33

    Scott,

    Q: When was the last time CPI (year over year) was negative?
    A: 1954

    For all the shouting about deflation the average CPI in 2009 was negative 0.4. Compare that to deflation in the “real” depression when the CPI was -9.0 in consecutive years.

    What people want is an economic / monetary policy that provides some confidence that incomes will grow faster or stay level with prices. Perhaps no one can provide that but a theory that fails to make the argument will not garner popular support.

  67. Gravatar of Greg Ransom Greg Ransom
    5. March 2014 at 07:43

    Japan has experience massive productivity gains — ie superior output and grearly reduced cost,

    So you science here is crap, Scott.

  68. Gravatar of o. nate o. nate
    5. March 2014 at 08:22

    I don’t think asking whether money is easy or tight is the most relevant question. The important question is whether the economy is operating at or close to potential. The answer there is clearly no. So the Fed has more work to do. The way to do it is not to loosen money, whatever that means, but to raise inflation expectations. Unfortunately they are hamstrung in achieving that by a strong hard-money bias among the 0.1%, ie. the patrons of docile government and media. It would take a bolder leadership at the Fed than currently exists to say that an inflation target of say, 5%, is compatible with their mandate and is in fact warranted. If they can make the pill easier to swallow by calling it NGDPLT, then more power to them.

  69. Gravatar of nickik nickik
    5. March 2014 at 08:45

    Seams to me arguments like ‘in a free banking system people could loose all there money are idiotic’ and thing arguments like that include ‘Murphy’s law’.

    The counter argument is, how many times have central banks created a hyperinflation, how many times have central banks created a deflationary situation.

    Bad things can happen in any system FDIC does not hold forever, the government is no magical insurer that never runs out of money. Governments have been known not to pay things they said they would.

    Its unfair to use a best circumstance approach for one side and not the other.

    George Selgin work on the Fed has shown that post-fed crisis are worse then pre-fed crisis, this is true even if you take out the interwar period. And the comparison is with pre-fed american banking system witch was a huge clusterfuck as well. If america had opted for a true free banking system instead of the fed we would have a way better track record in buissness cycle terms.

    You can repeat as many horror scenarios of ‘people could still lose all there money’ when theory and practice just show that it would overall improve the situation.

    That beeing said you can just fix the reserve do free banking and leave when you have a economy trending on 5% NGDP growth.

  70. Gravatar of nickik nickik
    5. March 2014 at 08:52

    On another point the discussion of easy or tight seams idiotic. Different people look at different measures. Some look at interest rates, some at NGDP, some of base money and so on.

    Why not just stop talking about easy/tight and just say ‘monetary policy insufficient to reach desired NGDP’. Just spell it out and start asking others to spell out there argument also.

    We seam to be getting held up by linguistics instead of economics.

  71. Gravatar of Dan W. Dan W.
    5. March 2014 at 08:55

    o. nate,

    Does it matter to understand why the economy is under performing or is “more money” always the right answer?

  72. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 09:17

    Daniel,

    There is no such thing as a “deflationary death spiral”.

    And the argument that the Fed lowering rates and buying assets does not spur economic recovery is true, based how how “economic recovery” is defined.

    Not everyone defines “recovery” as “misleading investors and workers through non-market driven manipulations of the currency such that they “do something” now in a physically unsustainable manner which will only postpone previous and cause new errors which will require even more painful corrections later on“.

    Then again, not everyone are myopic, uninformed and counter-productive.

  73. Gravatar of John Becker John Becker
    5. March 2014 at 09:19

    Daniel,

    There’s no such thing as a deflationary death spiral. Prices always reverse. Name times since 1913 where the economy crashed and monetary policy brought it back. For someone who criticizes me for not using facts, I’ve never seen you offer up anything.

  74. Gravatar of o. nate o. nate
    5. March 2014 at 09:33

    Does it matter to understand why the economy is under performing or is “more money” always the right answer?

    More money isn’t always the answer. If inflation was running above target and unemployment was near the natural rate, then less money would be indicated. Obviously we’re not in that situation.

  75. Gravatar of Doug M Doug M
    5. March 2014 at 09:37

    The market need easy money because prices are sticky and inflation is the way to move real prices, since nominal prices refuse to fall.
    Okay….
    To what degree are prices sticky because we expect inflation?
    If you lived in the tail end of the 19th century, you would think it normal, that for most people their wages (nominal) were about the same over their entire working lifetime, but their standard of living was improving, because the prices of goods were falling.

    Something that really bothered me, in 2009, social security benefits were not increased. CPI was flat and no cost of living adjustment was in order. The chattering classes repeatedly referred to this as a benefit cut. It is only a cut, because we have come to expect inflation every year.

    Dan W.
    CPI year over year was negative between July of 2008 (CPI 219.0) and July of 2009 (CPI 214.7).

  76. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 09:38

    Roger:

    Excellent point. One of the most common fallacies I see on this blog is reasoning from a spending change.

    We should be reasoning from individual action. That way, it is less likely that we will fail to notice that inflation does not affect all individual incomes, and hence it does not affect all relative prices and spending equally, and hence it does not affect the real capital structure of the economy equally.

    And, like you mentioned, inflation also harms some people and benefits other people, in the short run, and makes everyone worse off in the long run. People are struggling now in large part because of the long run negative effects of undue inflation in the long run past.

    The main confusion of MMs and Keynesians, it would appear, is what’s called hypostatization or reification fallacy.

  77. Gravatar of Daniel Daniel
    5. March 2014 at 09:41

    Major_Freedom,

    When you stop relying on circular logic, we’ll talk.

    John Becker,

    Way to miss the point, bro. The economy doesn’t just “crash” on its own. Since (for better or worse – I’d say worse) we have central banks, it is central banks which “crash” the economy – via printing too much money – or not enough of them. And yes, “not enough money to go around” is an actual problem, regardless of what charlatans like Mises thought.

    So let me rephrase that for you – when did the Fed strangle the economy with tight money and did easing monetary policy fix it ?

    The answer would be a resounding YES – see 1921, the 1930s and recent events.

    Like before, I don’t expect you to reconsider your obscurantist stance on macro – religious sensibilities are not amenable to facts.

    For example, let’s look at your latest gem

    There’s no such thing as a deflationary death spiral. Prices always reverse.

    Oh, just like they did in the 1930s ?

  78. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 09:43

    Doug M:

    I mention that same argument all the time here, without it being challenged.

  79. Gravatar of Daniel Daniel
    5. March 2014 at 09:48

    The 19th century was not a period of nominal stability

    http://dshort.com/inflation/inflation-recessions-1872-present.gif

    http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#Free_Banking_Era_to_the_Great_Depression

    And yes, wages were sticky back then too.

    Only a brain-washed moron would attempt to re-write history.

  80. Gravatar of o. nate o. nate
    5. March 2014 at 09:53

    The market need easy money because prices are sticky and inflation is the way to move real prices, since nominal prices refuse to fall.

    Sticky prices aren’t the problem right now. Sticky debt (ie., debt denominated in nominal terms, ie. all of it) is. Less sticky prices actually make the problem of sticky debt worse.

  81. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 09:58

    Daniel:

    I’ve already corrected your erroneous accusation of “circular logic.”

    I’ll just take this latest and yet another dodge.

    I enjoyed your Freudian slip that markets don’t crash on their own, but rather that crashes are caused by central banka. You just inadvertantly conceded what Austrians have been saying all along.

    The next step for you to take is to realize that you, indeed everyone, do not have the intellectual wherewithal to know if money is too tight or too loose, based on empirical observationa of fiat money statistics. It could very well be the case that money is much too loose now because what we would otherwise be observing today in an unhampered market is significant falling prices and domestic spending. Thus,it could very well be the case that the low positive price inflation and the increasing aggregate spending, represents another inflationary boom is underway.

    The past does not necessarily repeat for humanity. We could be experiencing something new, and you’re just blind to it precisely because it’s new.

  82. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 10:04

    Daniel:

    Wages were far LESS sticky in those days.

    Nobody is claiming wage rates and prices instantly adjust to every change in demand.

  83. Gravatar of Daniel Daniel
    5. March 2014 at 10:05

    It’s not a freudian slip, moron. I’ve been saying that all along. A central bank represents a single point of failure – which is disastrous, from an engineering standpoint.

    Adding in public choice theory, and the conclusion is that central banks have powerful incentives to get things wrong.

    However, you’re still missing the main point – we have a government, which demands taxes. And that won’t go away any time soon – nor is it clear that it should (I do favour shrinking government, in some areas at least). That means “legal tender” – and an obligations to manage it properly.

  84. Gravatar of Daniel Daniel
    5. March 2014 at 10:13

    So, even a hard-core austro-obscurantist admits that stickiness will always be with us.

    If I didn’t know better, I’d say it implies that properly managing aggregate demand (aka “monetary policy”) is a public good.

  85. Gravatar of John Becker John Becker
    5. March 2014 at 10:13

    Scott,

    All extended depressions are different and unpredictable and explaining them is economic history rather than economic theory. These questions you asked are asking for an exposition of economic theory applied to history rather than an attack on any theory.

    It is true that Mises and Hayek thought that the result of the central banks efforts to prevent a bust would eventually lead to hyperinflation; the Katastrophenhausse or crack-up boom as Mises memorably called it. As the history of recent years has shown us, this can go the other way if money demand is high. I admit that the Austrian economists did not see this coming. However, as you’ve said before, economics can only make conditional predictions. Knowing that other things equal, more money equals higher prices and seeing lots more money lead to vocal warnings of inflation. Attacking the economists who said this is fine (they might have ignored other aspects of economic theory) but I don’t think you’d deny that in general more money leads to prices being higher than they would have been otherwise.

    As far as I know, Hayek addressed the subject of the extended Great Depression the most (Rothbard’s book on the depression only covered the first few years). What Hayek implied was that the central bank created unsustainable production patterns by unknowingly setting rates too low and creating a boom. By cutting rates after that, the economy was never able to get the market signals to correctly adjust. I think this applies in the case of the U.S. and Japan. The liquidation of what turned out to be bubble activities which would have happened in the free market never took place. As a result, there has been a perpetual imbalance between consumer preferences and production. This imbalance is manifested in unemployment and slow GDP growth. However, the causation runs from an imbalance in the economy to slow GDP growth, not the other way around.

    In addition, Robert Higgs has done great work on the Great Depression emphasizing regime uncertainty (the silly programs like the NRA are a part of that) depressing long-term investment. The basic point is that if you aren’t sure what property rights are going to be in 5 or 10 years, there is dampened incentive to make long term investments and this shows in the statistics. U.S. capital stock aged and wore down during the Great Depression. I think that there is a great deal of that going on today. Especially regarding the healthcare and financial sectors.

    http://www.econtalk.org/archives/2008/12/higgs_on_the_gr.html

  86. Gravatar of TravisV TravisV
    5. March 2014 at 10:16

    Greg Ransom,

    You think we should tighten monetary policy? Really?

    I see you’ve interacted with David Glasner a lot, who advocates easier money. Where does Glasner’s thinking go wrong?

  87. Gravatar of John Becker John Becker
    5. March 2014 at 10:18

    I’d like to add that every economic school of thought has made both good and bad predictions over the last 10 years. Many Austrians were saying that housing was overvalued from 2004 onwards. However, the inflation predictions turned out incorrect. EMH guys like Fama never predicted or warned about a possible fall in housing prices or that leading to a financial blowup. Predictions about unemployment from Keynesians like Christina Romer turned out to be completely off but they were right about price inflation staying under control. None of this proves or disproves any of the theories.

  88. Gravatar of Daniel Daniel
    5. March 2014 at 10:20

    As a result, there has been a perpetual imbalance between consumer preferences and production.

    Because the private entrepreneur is both the engine of progress – and a total moron – simultaneously.

  89. Gravatar of John Becker John Becker
    5. March 2014 at 10:21

    Also, if money is so darn tight, why do we have price inflation at all. Our nominal rates are similar to Japan’s but we’ve had inflation over the last 5 years and they haven’t for the last 20.

  90. Gravatar of Daniel Daniel
    5. March 2014 at 10:23

    EMH guys like Fama never predicted or warned about a possible fall in housing prices

    Seeing as how EMH implies that predictions are impossible, I’d say you’re missing the point. Again.

    None of this proves or disproves any of the theories.

    That’s a roundabout way of saying you’re not interested in doing science.

  91. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 10:48

    Scott, if you’re looking for answers to your specific questions, I can give you at least one on behalf of someone else: Vincent Cate. Vincent is convinced that Japan will experience hyperinflation within two years. He defines hyperinflation to be 2% inflation a month or greater (I believe). I alerted him to your post, but he has not … oh , shoot, I just did a search, … looks like he did respond, but in a very general way. He could have been much more specific:

    Scott asks (in regard to Japan):
    “If it’s easy money, how much longer before the high inflation arrives?”

    Vincent’s response:
    Hyperinflation (> 2% inflation per month) within two years.

    Vincent, is that fair? We’ve been over this before and I think that accurately portrays your views.

  92. Gravatar of Max Max
    5. March 2014 at 11:03

    One definition of monetary ease is to ask whether short term interest rates are expected to sharply increase. If yes, money is easy. Absolute rates tell you nothing about monetary ease, but the yield curve tells you something. Most recessions are preceded by an inverted yield curve (i.e. tight money).

  93. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 11:03

    … Vincent has Austrian-like views, but I don’t know if it’s fair to describe him as an Austrian. He links to his site above.

  94. Gravatar of Dan W. Dan W.
    5. March 2014 at 11:13

    Doug M,

    Concerning CPI what you said is correct. My claim that one must go back to 1954 to find a negative year over year change in CPI is based on a January – January measurement and is sourced from the link below.

    What you and I are both recognizing is that whatever deflation did exist between 2008 and 2009 was quickly stopped and has not returned. The evidence suggests the deflation bogeyman is even more obscure than his inflation counterpart.

    http://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/

  95. Gravatar of Doug M Doug M
    5. March 2014 at 12:06

    Daniel,
    “Seeing as how EMH implies that predictions are impossible, I’d say you’re missing the point. Again.”
    Spot on.

    “The economy doesn’t just “crash” on its own.”

    I would say, yes it does. The growth of the economy depends on feedback. Typically, economists call this feedback a vicious or virtuous cycle,but it is feedback, nonetheless. This feedback creates a fundamental instability. While with hindsight, we can usually find some cause that has pushed us out of some sort of region of local stability (I hate to call this equilibrium) to say that this caused the crash is incorrect. The precipice was always there.

  96. Gravatar of John Becker John Becker
    5. March 2014 at 12:12

    Daniel,

    That statement I made didn’t imply that entrepreneurs are morons. If interest rates aren’t giving them the correct signals, they have no way of knowing what the interest rate would be absent the Fed setting rates.

  97. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 12:19

    Daniel:

    “So, even a hard-core austro-obscurantist admits that stickiness will always be with us.

    If I didn’t know better, I’d say it implies that properly managing aggregate demand (aka “monetary policy”) is a public good.”

    Hey neat, you don’t know any better.

    That prices don’t instantly adjust to changes in demand does not justify pointing guns at people so that money can be monopolized after which some people can experience a relative increase in nominal income which of course increases the totality of nominal incomes.

    That is a non sequitur.

    The actual solution to a peacefully derived “problem” is a peaceful solution.

    Yes, I get it that you believe guns can solve all social problems, but your “solution” makes the problem worse, and, it causes new problems besides.

    Oh, and there is no such thing as “public goods”. All goods are good or bad as valued by individuals.

    Seriously, do you ever think of solutions that are based on peace, or is mommy and daddy’s guns all you can think of? Were you abused growing up?

  98. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 12:27

    Daniel,

    If a radio signal is being jammed, it doesn’t matter how intelligent you are, you will not be able to hear what is actually being said.

    The issue of monetary distortions is NOT based on an assumption of people’s intelligence or lack thereof. It is based on the idea that if you can’t observe a particular empirical concept such as unhampered interest rates and unhampered relative prices and spending, then you can’t know what they are. You will be acting using information that does not accurately reflect true consumer preferences.

    If investors are not morons, then why do YOU believe they are so stupid they need mommy and daddy government to rescue them from themselves? You are contradicting yourself.

  99. Gravatar of Daniel Daniel
    5. March 2014 at 12:28

    John Becker

    they have no way of knowing what the interest rate would be absent the Fed setting rates.

    You do realize that you are (once again) begging the question, right ? In fact, this seems to be a common modus operandi among austrians.

    So the Fed sets the nominal (as opposed to real) interest rates. So what ? How exactly is that an “incorrect signal” ?

    Major_Freedom,

    You’re a moron. Once again. You’re boring.

  100. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 12:33

    Doug M

    The economy isn’t a circuitboard. Confusions are bound to occur when you think about the economy as a “system” that has to be controlled via a single mind or plan.

    The phenomena of which you are referring to with the term “feedback”, doesn’t imply free markets crash. You are letting your mind go to the depths of hell and ignoring the fact that there are other individuals in the world who learn.

  101. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 12:45

    I think I have a very good handle on how inflation gets out of control, even using many different theories. It is a feedback loop that can be viewed in many different ways. But I do not yet have any good theory to say when the death spiral will start. So predictions of the when are more educated guesses than backed by theory.

  102. Gravatar of Doug M Doug M
    5. March 2014 at 12:45

    Major,
    “You are letting your mind go to the depths of hell and ignoring the fact that there are other individuals in the world who learn.”

    My “model” absolutely depends upon individuals in the world who learn. It also depends upon individuals who make mistaken judgments of what the future might hold. These mistakes are not a result of anything inferior in perceptions, but, because, quite simply, the future is hard to predict. When many people wager, invest, in a future that depends upon a prediction that does not come true, that is “malinvestment”, in the Austrian tradition. Nothing requires an activist central bank to sow the seeds of malinvestment. The economy will do that all by itself.

    You can argue that the central bank exacerbates the problem, but it is not a necessary.

  103. Gravatar of John Becker John Becker
    5. March 2014 at 12:46

    Daniel,

    In a free banking system, the amount of savings (supply) and demand for loans would set interest rates. Since the Fed sets rates (within certain bounds), observed rates of interest may be different from rates set by savings and loan demand. Another way to look at it is that there is a difference between saving money and printing money even though both tend to lower rates in the short run.

  104. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 12:57

    I think people who advocate NGDP targeting or some fixed inflation rate have not faced the issue of inflation getting out of control. This is the big flaw in all the stimulus, money printing, NGDP targeting, inflation targeting theories. Need to face the issue of inflation getting out of control. It happens in the real world all the time.

  105. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 13:07

    … but Vincent, with regard to your specific predictions about Japan, was I out of line (see above), or did I represent your views accurately? Sumner was complaining that nobody answered his questions, and I thought what you’d told me in past discussions was a direct specific answer and would be exactly what Sumner was looking for.

  106. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 13:21

    Daniel:

    I am not here to make you feel better about yourself, but to educate you.

    To answer your question for why prevailing interest rates are “incorrect” is not that nominal rates do not equal real rates, but that nominal rates would in a free market communicate true consumer time preferences which regulqte investment temporally. But because prevailing rates are a function of intervention, regular profit seeking behavior, rather than preventing undue relative expansions of any particular stage of production, end up being a component of bubble fueling. Unhampered prices and interest rates would put a stop to such undue investment through losses, but non-market inflation prevents those signals from being observed.

    It is why we typically see bubbles associated with “manias” and “animal spirits” in the public discourse.

    In a free market, if too many resources and labor get allocated to the housing market for example, which represents a higher order stage of production due to its capital intensiveness and associated complimentary resource needs, then the relative rate of profit will decline as the urgency of need for the same class of resources and labor elsewhere in the economy becomes more and more felt.

    But with inflation and credit expansion, the mania in housing can keep going and going, despite the fact that marginal resources should be going elsewhere. Investor chase profits, and if profits are not falling in a particular stage, then a real based correction will be much more painful than it otherwise would be in a free market.

    The biggest lesson you need to learn is that no matter what problems you percieve to exist in the market process of production and voluntary exchange, the best solution is also peaceful, and that destructive activity such as statism/intervention, makes things worse.

    Sure, it helps some people at the expense of others in the short run, but that doesn’t mean it can be universalized.

  107. Gravatar of Daniel Daniel
    5. March 2014 at 13:22

    In a free banking system, the amount of savings (supply) and demand for loans would set interest rates.

    Whoa, do you realize you’re using the IS-LM model ? Which is based upon all sorts of dubious assumptions, anyway – and pretty much useless in practice.

    http://marketmonetarist.com/2013/01/04/daniel-lin-is-teaching-macro-lets-introduce-his-students-to-the-islm-model/

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/07/an-upward-sloping-is-curve.html

    Be aware that as long as you remain to committed to defending pseudo-science, you’ll be forced to come up with all sort of far-fetched arguments (like the one above).

  108. Gravatar of Michael Byrnes Michael Byrnes
    5. March 2014 at 13:27

    Vince Cate wrote:

    “I think people who advocate NGDP targeting or some fixed inflation rate have not faced the issue of inflation getting out of control. This is the big flaw in all the stimulus, money printing, NGDP targeting, inflation targeting theories. Need to face the issue of inflation getting out of control. It happens in the real world all the time.”

    Inflation cannot “get out of control” without NGDP also getting out of control. NGDPLT calls for tightening monetary policy in response to expectations of excessive NGDP growth.

  109. Gravatar of Daniel Daniel
    5. March 2014 at 13:29

    Oh goodie, M_F wrote another page consisting solely of bare assertions and circular logic.

  110. Gravatar of Cory Cory
    5. March 2014 at 13:38

    When I try to talk to conservatives about what Market Monetarists are saying, the response I get is that “Well obviously ZIRP doesn’t work. It hasn’t worked for Japan.”

    They say things like “The FED has pumped in trillllllions in cash yet this has only raised growth a little bit.”

    “This is leading to Asset Price inflation if not regular inflation and that is the worst kind and it is what has caused the last two recessions; first in stocks and then in housing. This is all going to blow up in a huge debt bubble!”

    So in my experience, Conservatives faced with the propositions of Market Monetarism say that 1). Yes, this is Easy Money 2). Obviously easy money doesn’t work. Just look at Japan! Doubling down and doing even easier money will not work either!

    So the conservatives I have interacted with would say it is indeed easy money and that the results just show that easy money does not work.

    One conservative in particular that I engage with regularly is a Private Equity executive and he genuinely believes that it is Fear of Obama, Obamacare and the Long Term Fiscal Gap that are holding our economy back. He doesn’t necessarily advocate for ending QE and ZIRP but simply says that they don’t work. He thinks “socialism” is the cause of all of the problems in Europe and that it has nothing to do with tight monetary policy.

    I’ll say, “Well, perhaps you should look into some of these things these Market Monetarist guys who were influenced by Milton Friedman are saying. Look at the difference Forward Guidance made in 2013, etc.”

    He’ll say “Forward Guidance??? Give me a break. If you talked to business professionals and leaders as much as I do you would know they agree with me.”

    Other than the fact that I disagree with pretty much all of those canards that don’t really match the evidence, he is otherwise a smart and talented guy.

    I imagine this type of thing is what your average Wall Street Journal reading conservative believes.

  111. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 13:38

    Tom, you are correct that I think Japan will have over 26% yearly inflation rate in the next 2 years. But this is not really strong ground for a debate as it is kind of a guess. I think I am on strong theoretical ground as to how inflation will get out of control and would love to debate that.

  112. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 13:42

    “Inflation cannot “get out of control” without NGDP also getting out of control. NGDPLT calls for tightening monetary policy in response to expectations of excessive NGDP growth.”

    You think you can always control inflation by tightening. You think all the central banks with hyperinflation did not think of that? You need to understand how inflation gets out of control, which it can do.

  113. Gravatar of TravisV TravisV
    5. March 2014 at 13:48

    Major_Freedom,

    I understand that you believe that your proposed scheme is better than Prof. Sumner’s. But don’t you agree that Sumner’s NGDP futures targeting scheme is a huge improvement over the status quo? You seemed to concede that point in this old comment:

    http://www.themoneyillusion.com/?p=15602#comment-173676

    As you indicate, NGDP futures targeting would make the U.S. a better place. It would substantially increase macroeconomic stability.

    It seems like you agree with us about the way the world actually works. So what the heck are we really arguing about?

  114. Gravatar of Cory Cory
    5. March 2014 at 13:53

    In my experience, for the average conservative, the ones I talk to think we have incredibly easy money. It is all about the supply of money for them. They act astonished when they hear the claim that we do not actually have easy money under current conditions. A lot of Dr. Evil style exasperation about “trillllliiiioons of dollars being pumped in by the FED!”.

    Only thing that will stimulate the economy is reducing marginal tax rates, decreasing burdensome regulations, eliminating welfare/SNAP/Unemployment insurance that discourages work, having a Congress and President that are “business friendly” and don’t demonize business etc.

    What FED is doing is considered “artificial” and a cheap way to “prop up” the economy.

  115. Gravatar of Don Geddis Don Geddis
    5. March 2014 at 13:56

    @miami vice: “You’re the fed chairman. What would easy monetary policy be and how would you implement it? … I mean real things you would do. Easy money.

    You sound like a person of the Concrete Steppes. But in any case, the answer is pretty easy: (1) Announce a change in monetary policy target: NGDPLT. From now on, the Fed will ensure exactly 5% annual nominal growth. (2) Announce the Fed will do “whatever it takes” to hit the target. (3) Since growth is currently below target, announce QE infinity: the Fed will begin next month with $10B in OMPs, purchasing Treasuries on the open market. If expectations remain below target, the next month $20B will be purchased. Next month $40B. Next month $80B. Etc. Purchases will double every month until the target is reached.

    That’s it.

    Also please don’t say things like “if the central bank bought up everything on earth” since that ignores the rules by which most monetary authorities operate. Please don’t suggest that when people sell bonds to the feds all of a sudden they have to get rid of it by consumption since, “hot potato”.

    You asked the question about concrete steps, so I gave you the concrete actions. But surely your followup question would be, “but why do you expect that to succeed at actually raising NGDP?” The answer to the expectation question, involves the threat to “buy up planet earth”, and the hot potato effect, etc. It’s kind of silly for you to ask the question, already know the answer, and then demand an answer where you explicitly rule out the answer that has already been given.

  116. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 13:57

    Scott,
    Off Topic.

    Steve Keen says you were the first to blame tight monetary policy for the US Great Recession and links to one of your most recent posts.

    http://www.nakedcapitalism.com/2014/03/steve-keen-godzilla-banks-good.html

    “…There is a line of thought that blames central banks for causing the crisis — with Scott Sumner being the first to outright blame the 2007 crisis on Ben Bernanke.

    http://econlog.econlib.org/archives/2014/02/in_the_1930s_it.html

    I don’t blame them for causing the crisis, but rather for letting the force build up that would make one inevitable — by letting bank debt get much, much larger than GDP without batting an eyelid…”

    I think he’s right about you being among the first to claim monetary policy was too tight, but he’s wrong about when you did it. That was almost certainly in your very first blog post.

    Obviously he thinks this is a shocking claim! (Shades of Count Floyd…scary children!!!)

    https://www.youtube.com/watch?v=MEjdt_n1l-4

    I’m shocked that he’s shocked. (Actually not, since after all, it’s Steve Keen.)

  117. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 13:59

    Vincent, one thing I’ll grant you is if you go back and watch on youtube the old hour long “Inflation” episode of “Free to Choose” hosted by Milton Friedman, it’s super interesting to see how inflation seemed like the a difficult perplexing conundrum in the 1970s: everyone was scratching their heads about what to do about it, and Milton’s message was unwavering: (paraphrasing) “Just have the discipline to print less money!” It’s funny how times have changed.

  118. Gravatar of Cory Cory
    5. March 2014 at 13:59

    Nickik

    “We seam to be getting held up by linguistics instead of economics”

    I am not a trained economist and I often feel these debates are Wittgensteinian Language Games.

  119. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 14:12

    Daniel:

    No, the framework is not based on IS-LM. It is based on the fact that both time preference and inflation affect interest rates, that investors need unhampered rates in order to prevent undue relative expansions.

    And you still haven’t shown this alleged “circular logic.” I know you are only responding the way you do because you don’t have the requisite knowledge to get it. This is because you clearly don’t read the subject matter you’re criticizing.

    You don’t even seem to realize that Hayek won a Nobel prize in large part because of what I am explaining to you. This isn’t something you summarily dismiss. You have an obligation not just to understand what it is you are knee jerking against, but to educate yourself, as I do, even in the literature of your ideological and ethical opponents.

  120. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 14:14

    There are several ways that inflation gets out of control. First, the government will have a large debt and deficit.

    It can’t fix the deficit as there is no political way to cut spending that much and increasing taxes enough is just not possible.

    So the government is selling lots of bonds. If other people stop buying them the central bank must or the government and central bank fail. So the monetize. But the more they monetize the less people want to hold bonds. So there can be a flood of new money from monetization, because there is no other choice.

    The other problem is velocity of money. The central bank tightening will tend to drive up interest rates which will drive up the velocity of money.

    So you can get to where no matter what move the central bank makes, as long as the government is kept from failing, there will be inflation.

  121. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 14:21

    Tom, if the government does not have the discipline to balance the budget it will not have the choice to just print less money. Many governments can not control their budget and so lose control of money printing.

  122. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 14:27

    TravisV:

    We’re arguing over the persistent evading and/or denial from MMs that what they are proposing cannot be made permanent with either full socialism or hyperinflation as the end result. The last major round of bail outs did not eliminate the problems. They were transferred, IMO, to the debt markets, especially government debt.

    When I said that NGDP targeting is superior to price targeting, that did not mean I want NGDP targeting, or even that NGDP targeting is beneficial. I meant it in a “Getting shot in the kneecap is better than getting shot in the liver” kind of way.

    If you will permit yourself to be “rooting” for a change to the status quo for the better, then please stop trying to convince me to cease “rooting” for an even better change the stats quo. No, I reject the nonsense that only small changes are possible. Such a world only seems that way if people already have the idea in their minds that small changes are the only changes possible.

    Human life is not a given, awaiting for us to simply deal with in an almost passive manner. For us humans, we CREATE our won society (subject of course to physical and economic laws).

    You and many others here seem to be lumping in psychological emotions and other non-absolutes into the mix of social laws as if there is nothing we can do to change them.

    Real change for the better has never occurred under pragmatism or incrementalism. Pragmatism doesn’t work on its own terms.

  123. Gravatar of W. Peden W. Peden
    5. March 2014 at 14:34

    Vince Cate,

    “You think you can always control inflation by tightening. You think all the central banks with hyperinflation did not think of that?”

    Actually, it’s a characteristic feature of central banks during hyperinflation (and often periods of high inflation i.e. >10%) that they attribute the inflation to non-monetary causes. The Argentine central bank today rejects the quantity theory of money, while Historical School radically anti-Ricardian ideas infested many post-WWI central banks.

    So either central banks creating hyperinflation think of tightening the money supply, but don’t and pretend it wouldn’t matter anyway, or they don’t think that tightening the money supply would make a difference.

  124. Gravatar of W. Peden W. Peden
    5. March 2014 at 14:36

    “The other problem is velocity of money. The central bank tightening will tend to drive up interest rates which will drive up the velocity of money.”

    Goodness, it’s like Nicholas Kaldor and the ‘mythical’ cavemen Keynesians all over again.

  125. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 14:48

    W. Peden,

    I don’t know what this means:
    “Goodness, it’s like Nicholas Kaldor and the ‘mythical’ cavemen Keynesians all over again.”
    but it sounds funny. Please explain.

  126. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 14:51

    There is nothing mythical about the relationship between interest rates and velocity of money.

    http://www.hussmanfunds.com/wmc/wmc110124.htm

  127. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 14:53

    W. Peden,
    “Actually, it’s a characteristic feature of central banks during hyperinflation (and often periods of high inflation i.e. >10%) that they attribute the inflation to non-monetary causes.”

    Not just high inflation. This is also true of low inflation as well. For example ex-BOJ Governor Shirakawa blames Japan’s deflation on their demographics as highlighted by Hugh Edward’s recent post on Abenomics. Anytime inflation is too high or too low, central banks tend to pass the buck (so to speak).

  128. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 14:55

    Mark, what do you think of Vincent’s hussman funds link above?

  129. Gravatar of W. Peden W. Peden
    5. March 2014 at 14:57

    Tom Brown,

    In a 1984 article, Alan Blinder said that “the bad old days in which Neanderthal Keynesians roamed the land, spreading the false word that money does not matter” were over by the early 1950s. In the US, this may have been true, but in the UK ‘Neanderthal Keynesianism’ had considerable influence well into the 1980s.

    In particular, the idea that changes in the money supply would be largely or even entirely offset by changes in velocity was present in UK policy until about the time we had 25% inflation, not coincidentally after a huge surge in all the measures of the money supply.

  130. Gravatar of W. Peden W. Peden
    5. March 2014 at 15:00

    Mark Sadowski,

    True. As Milton Friedman noted, central bankers’ estimations of their powers vary, depending on how well the economy is doing, but I think that often hyperinflation and depression really are theoretical (which I use as a neutral version of ‘ideological’) rather than political. And, of course, we all are inclined to favour theories that allow us to do the most politically profitable thing.

  131. Gravatar of W. Peden W. Peden
    5. March 2014 at 15:01

    “There is nothing mythical about the relationship between interest rates and velocity of money.”

    Yes, I am familiar with textbook macro. The issue is whether the interest-rate elasticity of money poses an insuperable obstacle to disinflation.

  132. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 15:01

    W. Peden, so you’re comparing Vincent to the “Neaderthal Keynesians?” He’s going to love that. :D

  133. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 15:02

    Central banks and governments always say inflation is not their fault. If Japan or the US get inflation they will point the finger at something other than money printing. Maybe the price of oil. They will keep printing because at the end of the day it is the only way the government will get money to spend.

    This is the key to understand. If the market will no longer buy the government bonds, how will bonds be paid as they come due? So if you were rolling over $18 trillion, and now it is coming due (lots of short term bonds) and the government has a huge deficit, how are these bonds going to be covered? the central bank will have to print trillions. Or the government shuts down. Defaulting does not even solve the problem because of the huge deficit. They must print.

    You may say the market will always buy bonds, but to say this you have to ignore history.

  134. Gravatar of W. Peden W. Peden
    5. March 2014 at 15:04

    (In the UK, nonmonetary views of inflation were dominant, until the Thatcher government abandoned incomes policies and brought inflation down to 5%, after which support for incomes policies began to die out and switched from a policy for controlling inflation to a policy to lower unemployment. As Edward Nelson put it, cost-push inflation proponents have to explain why UK inflation didn’t fall until the remedies for cost-push inflation were abandoned.)

  135. Gravatar of W. Peden W. Peden
    5. March 2014 at 15:06

    Vince Cate,

    “They must print.”

    Such an increase in the monetary base will not be inflationary if reserve requirements are raised and/or private sector deposits are squeezed.

    Double the monetary base and double reserve requirements. What happens?

  136. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 15:09

    Vince ignores name calling on other blogs and deletes it on his own. But if I was just called a Keynesian, it is the first time!

  137. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 15:11

    Once people are unhappy to leave their money in bonds they will also be unhappy to leave it in reserves. Velocity of money and quantity of money will both go up. You will get inflation.

  138. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 15:14

    W. Peden, I had a very similar thought regarding reserve requirements a while back. Neither Mark or Scott favored it, but both agreed it could be effective. Mark suggested IOR was a more “modern” way to go about it and Scott didn’t see a real problem with the CB selling off assets. I think Mark said something like “well if it makes you feel better to have both a belt and suspenders, there’s no harm in it.”

  139. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 15:15

    Right now as they print money in Venezuela, Argentina, and Ukraine, does it just end up in reserves?

  140. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 15:21

    “Vince ignores name calling on other blogs and deletes it on his own.”

    I think I called you Vincent “Mad Dog” Cate once, when I saw that picture of you holding a machete on the beach. Lol… as far as I know you let that one stand. Lol

  141. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 15:23

    Tom Brown,
    Without having read the entire Hussman Funds link, the relationships observed in the graphs are of course all true. In fact Granger causality tests show there is bi-directional Granger causality between MZM velocity and the 1-year T-Bill, and that the 3-month T-Bill rate Granger causes the velocity of the monetary base, but not the other way around.

    But unlike Vincent I don’t believe hyperinflation happens overnight. There’s never been a case of hyperinflation (by the Phillip Cagan definition) that wasn’t preceded by several years of double digit inflation.

  142. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 15:36

    Mark, thanks for the quick review. So let’s say a nation is experiencing undesired double digit inflation but no other strange circumstances (lost wars, loss of tax base, massive corruption problems, loss of access to international credit, etc): does anything special need to be done to get inflation back on track other than tightening money? Do they need to eliminate their deficit? What would you do to make sure that hyperinflation didn’t happen?

  143. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 15:43

    But when I say hyperinflation can start suddenly i am not using the Cagen definition. If we went from 0% inflation one month to 2% monthly inflation the next (as many countries have done) I would say hyperinflation started suddenly. I use 26% per year, as explained here;

    http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html

  144. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 15:52

    Tom Brown,
    They just need to tighten monetary policy.

    With respect to the role of fiscal deficits and inflation
    I just happen to have a Milton Friedman quote (that I agree with) handy):

    “There is no necessary relationship between the size of the Public Sector Borrowing Requirement and monetary growth.”
    Milton Friedman in evidence to the Treasury and Civil Service Committee of the House of Commons.

    Cited in “Public Expenditure: Its Defense and Reform” by
    David Heald, p.51.

  145. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 15:54

    Mark,

    1. Do you believe it’s possible for a country like the US or Japan to jump from 0% inflation one month to 2% per month the next? (Vincent says there are examples)

    2. If this happened, and there were no other odd circumstances (like I outlined above) how quickly do you think this spike in inflation could be eliminated? What’s your vision for how that would be done?

    3. What are the chances it could not be eliminated and 26% or more annual inflation would result… possibly for multiple years, and possibly leading to higher inflation? Is there some kind of critical breakdown that would have to happen for this to be the result (assume the CB plays its cards perfectly through all this).

  146. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 16:07

    “There is no necessary relationship between the size of the Public Sector Borrowing Requirement and monetary growth.”

    This is true as long as the public is buying bonds. However, if the public stops buying bonds, and the only buyer is the central bank, then this is no longer true.

    Mark, imagine the public stops buying bonds and $4 trillion in bonds comes due this year while the government is running a $1 trillion deficit. Further imagine Democrats won’t cut spending and Republicans won’t increase taxes (gridlock as far as fixing the deficit). Do you foresee any other outcome besides the Fed monetizing $5 trillion in government debt?

  147. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 16:07

    … let me take a crack at answering my own questions how I think you might answer them:

    1. Possible but not likely.
    2. A few months of tight money should do the trick.
    3. Low. A critical breakdown would most likely be required.

  148. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 16:14

    Let me modify that to “any other outcome than the Fed monetizing $5 trillion or more”.

  149. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 16:19

    @Tom Brown,
    I mostly agree with the answers you selected for me.

    But to be clear I believe in the Cagan definition of hyperinflation (very few people believe in any other). 26% annual inflation is setting the bar far too low.

    Nevertheless I’d love to hear of examples where inflation went from 0% to 2% in a single month.

    @Vincent,
    Argentina is in a similar situation to the one you are describing (direct monetization of deficits because they are locked out of the credit markets). But Argentina is a hugely disfunctional country and has been that way for over a century. Heck, they only just had real hyperinflation as recently as 1990 and unless they do something they are headed for it again.

    But the US is not a candidate. It has absolutely none of the prerequisites.

  150. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 16:26

    What if they need to tighten to stop the 2% per month inflation but there is nobody else to buy bonds so they actually end up loosening? With 26% and rising inflation it is usually hard to find enough rich fools to buy the bonds.

  151. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 16:29

    Mark, do you think Japan is a candidate for 26% inflation?

  152. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 16:30

    Vince,
    No, Japan is not a candidate either.

  153. Gravatar of TravisV TravisV
    5. March 2014 at 16:32

    Major_Freedom,

    I don’t believe your doom-and-gloom predictions about the future. That’s the big picture that Sumner has really exposed as wrong.

    No, the apocalypse is not coming. The great wealth-creating engines of the U.S., Sweden and China will continue to churn out improvements in the standard of living.

    There’s nothing wrong with mixing free-market capitalism + social safety net and a little redistribution.

    The financial crisis was not a preview of a bigger looming apocalypse. It was mostly just a failure of monetary policy, which market monetarists know how to cure.

    Late 2008 was a crazy period that exposed the huge flaws of the Fed’s backward-looking informal inflation targeting approach. In late 2008, they were flailing wildly, providing market participants extremely unreliable forward guidance about what they would do in the future.

    Central banks are slowly incorporating the lessons of market monetarists, Christina Romer, etc. They’re making forward guidance stronger and paying more attention to market indicators.

    Therefore, I’m very optimistic that the next 30 years will feature plenty of growth and stability. Major_Freedom, the doom-and-gloom you forecast isn’t going to happen.

    Don’t fall for Major_Freedom’s apocalyptic paranoia!

  154. Gravatar of Michael Byrnes Michael Byrnes
    5. March 2014 at 16:36

    Vince Cate wrote:

    “What if they need to tighten to stop the 2% per month inflation but there is nobody else to buy bonds so they actually end up loosening? With 26% and rising inflation it is usually hard to find enough rich fools to buy the bonds.”

    They can tighten as much as necessary without selling even a single bond. Raising IOR is one way to do this. Raising reserve requirements is another. The Fed has the statutory authority to do either or both.

  155. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 16:36

    Mark, there are hyperinflation academics that use Caygen. But there are many more accountants that use 100% in 3 years as the cutoff for “hyperinflation accounting”. And the general population uses “hyperinflation” long before reaching Caygen’s level.

  156. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 16:39

    If the Fed tried to withdraw $5 trillion from the economy by increasing reserve requirements all banks would be bankrupt.

  157. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 16:46

    TravisV,

    I’m with you on not falling for apocalyptic paranoia in general (unless it’s warranted… like there’s a meteorite headed our way), however if enough people do fall for apocalyptic paranoia, I think it can actually change “reality” in the world of econ, since so much of econ has to do with what people perceive to be true (like, does gold have value?). Maybe not change to exactly what the paranoids’ vision is, but probably to something that nobody wants. That’s why it’s important to stamp out paranoids’ fires as fast as they light them.

  158. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 16:51

    Tom, do you think the inflation in Venezuela, Argentina, and the Ukraine is just because the paranoid view caught on? The backing view of hyperinflation could have been used to predict all 3 of these. I actually expected Argentina and a reader emailed me about Ukraine.

  159. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 16:52

    “If the Fed tried to withdraw $5 trillion from the economy by increasing reserve requirements all banks would be bankrupt.”

    First off, to eliminate current excess reserves they wouldn’t need to raise the requirements that much. Secondly if they did want to raise them that much, there’s no reason they couldn’t support the banks by making those reserves available. Third, why not just use IOR if there’s a problem… or a combination of both?

  160. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 17:00

    Vince,
    “Mark, there are hyperinflation academics that use Caygen.”

    The Cagan definition (sustained 50% a month for a year) is essentially the only one used by academics.

    “But there are many more accountants that use 100% in 3 years as the cutoff for “hyperinflation accounting”.”

    As you well know International Accounting Standards (IAS) 129 has a long list of requirements in addition to 100% inflation in three years. And although 26% a year will generate 100% in three years, that is a lower standard than 100% in three years.

    “And the general population uses “hyperinflation” long before reaching Caygen’s level.”

    I’m not interested in popular definitions.

  161. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 17:00

    To use IOR you would have to go way up. Not easy to say, but as you went up, say to 3%, the velocity of money goes up, so then you need to go to 4%, expected inflation is higher than that, so people rather buy stuff So then you got to keep going up. But now the interest on the Federal debt is more than the tax base, so people start to flee the dollar for tangible goods, or other countries. There will be no easy fix for a $5 trillion problem.

  162. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 17:06

    ‘I’m not interested in popular definitions.’

    The man in the street is having his live savings wiped out and the Ivory Tower Academic tells him, “that is not true hyperinflation so I am not going to study that”.

  163. Gravatar of ssumner ssumner
    5. March 2014 at 17:07

    Miami Vice, So what would I do if you forced me to do really bad policies? Instead of sensible policies? OK, here’s my least bad really bad policy:

    1. Announce level targeting of NGDP.

    2. Set IOR at negative 0.5%.

    3. Do OMPs of Treasury debt until the central bank’s internal forecast unit forecasts 5.5% NGDP growth for 2 years. Then I’d slow to 4.5% until the end of time.

    Greg, You said:

    “Japan has experience massive productivity gains — ie superior output and grearly reduced cost,

    So you science here is crap, Scott.”

    Of course this is false. But even if it were true it would have no bearing on my post, which did not address Japanese productivity. Take a deep breath and then take another wild shot.

  164. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 17:07

    TravisV:

    I’m not predicting “doom and gloom.”

    It is entirely possible for people to choose an alternate general course of action that can enable an avoidance.

    If I said “If you keep driving towards a cliff, then at some point it is certain you will drive over”, that is not me making a prediction of what choices the driver will make.

    Same thing with the economy and socialist money.

    “I don’t believe your doom-and-gloom predictions about the future. That’s the big picture that Sumner has really exposed as wrong.”

    How can Sumner have been proven right about some possible future event?

    “No, the apocalypse is not coming. The great wealth-creating engines of the U.S., Sweden and China will continue to churn out improvements in the standard of living.”

    No, not as long as fiat money is imposed by force. Fiat money systems have always collapsed throughout history as well.

    “There’s nothing wrong with mixing free-market capitalism + social safety net and a little redistribution.”

    Yes, there is. Read Mises’ essay “Middle of the Road Policy Leads to Socialism.”

    “The financial crisis was not a preview of a bigger looming apocalypse. It was mostly just a failure of monetary policy, which market monetarists know how to cure.”

    No, it was just another step in the continuing decline of central banking.

    “Late 2008 was a crazy period that exposed the huge flaws of the Fed’s backward-looking informal inflation targeting approach.”

    Every non-market approach to money is hugely flawed.

    “In late 2008, they were flailing wildly, providing market participants extremely unreliable forward guidance about what they would do in the future.”

    Extreme certainty in aggregate spending is not a savior. It is flawed as extreme certainty in price levels is flawed.

    “Central banks are slowly incorporating the lessons of market monetarists, Christina Romer, etc. They’re making forward guidance stronger and paying more attention to market indicators.”

    The problem of central banking isn’t lack of forward guidance. It is a lack of market signals.

    “Therefore, I’m very optimistic that the next 30 years will feature plenty of growth and stability. Major_Freedom, the doom-and-gloom you forecast isn’t going to happen.”

    Your optimism can only be justified if central banking were abolished.

    “Don’t fall for Major_Freedom’s apocalyptic paranoia!”

    Don’t fall for TravisV’s utopian faith!

  165. Gravatar of ssumner ssumner
    5. March 2014 at 17:09

    Jan, Stock prices don’t have important macro implication (as we saw in 1987) NGDP shocks do. That’s why macroeconomists focus on inflation and NGDP, not stocks. We are trying to prevent mass unemployment. At best, the stock market might give a warning when policy is becoming really bad, but as you noted that’s not the current problem.

  166. Gravatar of Daniel Daniel
    5. March 2014 at 17:10

    This is kinda how I picture Major_Freedom

    http://cdn8.keeptalkinggreece.com/wp-content/uploads/2011/09/tin-foil-hat.jpg

  167. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 17:11

    Vincent, re: Argentina and paranoid view: No, I don’t think that’s the problem in those cases. I just think that in general paranoia can cause problems where none needed to exist. For example if enough people became convinced that the Stock market was repeating exactly what it did in 1929, that could become a self-fulfilling prophecy (at least for a short time). JP Koning implies that may have contributed to 1987:

    http://jpkoning.blogspot.com/2014/03/beware-financial-jeremiahs.html

    I think mass psychosis does happen sometimes. Politically too (French Revolution, fascists, Cambodia, etc). A rational Hitler would have realized that Einstein could have made him a sweet ass A-bomb. Or the inhabitants of Easter Island who apparently went nuts deforesting the place to move useless stone heads around. Who would have predicted that? A critical mass of them believed (falsely) that it was a good idea… (I’m guessing some self-interested charlatans help whip them into a frenzy) and shazam! mass starvation.

  168. Gravatar of ssumner ssumner
    5. March 2014 at 17:11

    Mark, Not sure what Marko is talking about. Both myself and other MMs have always agreed that NGDP shocks cause huge problems for balance sheets.

  169. Gravatar of Vince Cate Vince Cate
    5. March 2014 at 17:21

    Sumner, so you agree that you can get a feedback loop that makes inflation hard to control?

  170. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 17:28

    Daniel, regarding picturing what commentators look like, have you seen this?

    http://noahpinionblog.blogspot.com/2012/09/econotrolls-illustrated-bestiary.html

  171. Gravatar of Daniel Daniel
    5. March 2014 at 17:36

    Tom Brown,

    Every blog has its own bestiary of trolls. M_F is a solid contender for biggest nutjob on the case.

  172. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 18:05

    Daniel:

    You mad bro?

  173. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 18:27

    Vincent, you write:

    “The man in the street is having his live savings wiped out and the Ivory Tower Academic tells him, “that is not true hyperinflation so I am not going to study that”.”

    There’s an assumption here that the man in the streets is living off of a pile of cash with a 0% nominal return. Isn’t it more likely the man in the streets has his savings in some kind of interest bearing financial instrument the rate of which is positively correlated with inflation? Same goes for his wages. And maybe his debts. If he instead has fixed rate debts (fairly likely), the above expected inflation rate might actually be helping him (and hurting his creditors… who are not likely to be “men in the streets”).

  174. Gravatar of Tom Brown Tom Brown
    5. March 2014 at 19:02

    @Anybody: O/T: Can someone explain why inflation targeting usually picks a number like 2% as a target? What’s the rational for that? What’s the matter with 0%?

    I think I read Scott make an offhand comment once that if 0% was targeted successfully (for inflation) it would require a huge central bank balance sheet. I believe Nick Rowe was making a similar point at the time. Is that correct? Can you explain why? Does it have something to do with cash providing a fixed 0% nominal return?

    If I recall correctly, Miles Kimball’s cashless proposal for a 0% inflation target assumes that nominal deposit rates would be negative. Of course nobody would put up with that if nominal 0% return cash was available. That kind of makes sense too: deposit rates don’t typically match the inflation rate. Does anybody know if that’s correct? I’m guessing that a cashless system like Miles describes would not require a huge CB balance sheet to hit 0% inflation.

  175. Gravatar of TravisV TravisV
    5. March 2014 at 19:02

    Major_Freedom,

    I encourage you to re-read your reply to me:

    http://www.themoneyillusion.com/?p=26274#comment-321806

    In 20 years, those words are going to look ridiculous.

  176. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 19:19

    I encourage you to change your mind before it’s too late. Your claims on the internet will likely remain on record for a very long time. You are going to look as foolish as Marxist utopians.

  177. Gravatar of TravisV TravisV
    5. March 2014 at 20:51

    Major_Freedom,

    Your views are so dark and pessimistic. You should give Friedman / Sumner optimism a try sometime!

    Look around! Can’t you see the neoliberal revolution happening all around you?

    http://www.econlib.org/library/Columns/y2010/Sumnerneoliberalism.html

    http://reason.com/archives/2013/01/22/the-neoliberal-revolution/print

  178. Gravatar of Don Geddis Don Geddis
    5. March 2014 at 20:55

    @Tom Brown: “Can someone explain why inflation targeting usually picks a number like 2% as a target? What’s the rational for that? What’s the matter with 0%?

    For one thing, sticky wages remain a problem at 0% inflation. People’s relative productivity goes up and down, but most people have a hard psychological barrier at making less money than the year before, in the same job. Whereas they will accept a 0% annual raise.

    So 2% inflation allows employers to give a poor employee a 1% raise. Which allows the employee and employer to agree on a real wage cut, without needing to so explicitly accept a nominal wage cut.

    In other words: 2% inflation instead of 0% allows labor market wages to be more flexible (given observed tremendous employee resistance for nominal wage cuts), which allows unemployment to be lower.

  179. Gravatar of TravisV TravisV
    5. March 2014 at 21:35

    Major_Freedom,

    If you read here, you can see that Kenneth Duda sympathizes with your plight:

    http://www.themoneyillusion.com/?p=26274#comment-321432

    However, he still agrees with us:

    http://econlog.econlib.org/archives/2014/03/ngdp_targeting.html#319269

  180. Gravatar of Maurizio Maurizio
    6. March 2014 at 02:23

    Correct me if I am wrong: Austrians believe that, if the central bank stabilizes NGDP growth, as Sumner suggests, it will have to print money at an ever increasing rate. This means that at some point it will have to choose between inflation and breaking the NGDP rule. To the contrary, Sumner believes that, if the central bank stabilizes NGDP growth, RGDP will follow, due to some transmission mechanism. Am I correctly depicting both positions?

  181. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 03:14

    I don’t really speak for all Austrians, but I think when the market slows on buying government debt that the central bank has to pick up the slack so the government has money to spend. However, the more the central bank monetizes the less the market wants to hold bonds. So you can get a death spiral where the central bank monetization is at least as much as all bonds coming due plus the size of the deficit. The market has been moving to shorter term bonds so there is lots of bonds coming due and you get hyperinflation. This seems to happen no matter what rules or laws govern the central bank ahead of time.

    The above is generic, not tied to one country. It is after debt and deficit get large.

  182. Gravatar of Vincent Cate Vincent Cate
    6. March 2014 at 04:57

    Tom, hyperinflation is really hard on the average guy. Rich people can exit a country, buy gold, or pick up land cheap and come through just fine. The average guy’s salary and wages do not keep up with inflation. As inflation goes up the interest rate goes up and loans go from 30 years to much shorter periods, even days or weeks. Because financing is so hard, the real value of land goes down. The governments always seem to put in price controls, which makes all kinds of shortages and kills the GNP. People have a hard time just getting stuff to keep alive. If you study hyperinflation you will see it is crazy bad for the average guy.

  183. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 05:44

    Tom Brown and Don Geddis,
    As an additional note, Janet Yellen was responsible for the fact that almost all central banks that target inflation target a 2% inflation rate. She convinced Greenspan in 1996 that a 2% target was superior to a 0% target. The Fed meeting minutes where the crucial exchange happened can be found at:

    http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf

    She cited work of Perry (recorded as “Parry” in the minutes) to support the argument, but it in fact drew on work by her and Akerlof, with the crucial Brookings paper being by Akerlof, Dickens, and Perry:

    http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/1996_1_bpea_papers/1996a_bpea_akerlof_dickens_perry_gordon_mankiw.pdf

    The behavioral econ foundation was the downward stickiness of nominal wages about which she and George had written extensively. In the face of this stylized real fact, to have micro labor market efficiency with changes in real relative wages, one must have some positive inflation to allow for some nominal wages to rise faster than others.

    Once Yellen convinced Greenspan, this argument spread across the world of central banking.

    There are of course many other arguments for why a positive rate of inflation is preferable to price stability or to outright deflation. But this is where the 2% figure that almost all central banks seem to target today originally came from.

  184. Gravatar of Vincent Cate Vincent Cate
    6. March 2014 at 05:49

    I meant “savings and wages do not keep up with inflation”

  185. Gravatar of Matt McOsker Matt McOsker
    6. March 2014 at 05:59

    Add tight money to flat and falling Government Consumption Expenditures & Gross Investment (a sizable chunk of the GDP formula) and we have a drag on NGDP growth. Many of the other elements such as PCE, net exports, and private investment have been moving in the right direction.

    http://research.stlouisfed.org/fredgraph.png?g=sKX

  186. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 06:02

    Maurizio,
    “To the contrary, Sumner believes that, if the central bank stabilizes NGDP growth, RGDP will follow, due to some transmission mechanism.”

    Sumner believes that in the long run money is neutral, so if you stabilize the rate of growth in NGDP, the rate of inflation will simply be the difference between the rate of growth in NGDP and the long run rate of growth in RGDP.

    The following link is to a dynamic AD-AS diagram, and which can be found in “Modern Principles: Macroeconomics” by Tyler Cowen and Alex Tabarrok:

    http://1.bp.blogspot.com/_JqNx8yXnFE8/SxlWoq_PI8I/AAAAAAAABCg/7y9VXIleCrs/s1600-h/Tabarrok-Cowen+ADAS.JPG

    You’ll note that the rate of change in the aggregate demand curve (AD) is equal to the sum of the inflation rate and the rate of change in real GDP (RGDP), and so is precisely equal to the rate of change in nominal GDP (NGDP). The rate of change in NGDP is determined by monetary policy.

    Note also the short run aggregate supply (SRAS/AS) curve and the Solow growth curve. The Solow growth curve is essentially the long run AS curve (LRAS). In the short run wages and prices are sticky (relatively inflexible) causing the SRAS curve to be upwardly sloped. In the long run money is neutral and wages and prices are flexible so the Solow growth curve is vertical. Thus shifts in AD influence the rate of growth of RGDP in the short run, but not in the long run. Similarly, shifts in AS influence the inflation rate in the short run, but in the long run the inflation rate will be determined by the point where AD and the Solow growth curve intersect.

  187. Gravatar of Matt McOsker Matt McOsker
    6. March 2014 at 06:16

    Mark – agree with your hyperinflation posts. I will add that many countries with high inflation also had dollar pegs, which is one of many factors often involved with inflationary problems.

  188. Gravatar of Maurizio Maurizio
    6. March 2014 at 06:50

    Thank you Mark. I’ll try to understand your explanation.

  189. Gravatar of Michael Byrnes Michael Byrnes
    6. March 2014 at 07:28

    Mauricio,

    Another way to think about it:

    NGDP is composed of real growth and inflation. (If nominal spending on output increases by 5% from one year to the next, that 5% is composed of the rate of real GDP growth and the rate of inflation).

    Real GDP growth can’t be measured directly, it is estimated by adjusting NGDP growth by a price index such as CPI. However, CPI itself, a weighted average of all of the goods and services bought and sold, is only an estimate. There are reasons to think CPI is wrong – for example, according to CPI, home prices rose 10% during the peak of the housing crisis!

    Any measure of real GDP thus includes whatever errors are made in calculating CPI.

    But, in any case, a period of high sustained inflation (such as the 70s) is also going to be a period of sustained high NGDP growth. If monetary policy succeeds in preventing excessive growth of NGDP, inflation won’t be a problem.

  190. Gravatar of Cory Cory
    6. March 2014 at 07:28

    In Reply to Vincent Cate,

    You said this:

    ““There is no necessary relationship between the size of the Public Sector Borrowing Requirement and monetary growth.”

    This is true as long as the public is buying bonds. However, if the public stops buying bonds, and the only buyer is the central bank, then this is no longer true.”

    My question is, what evidence is there that it is even remotely likely that we’re going to find a scenario where people would not want to buy treasuries?

    Former Undersecretary of Domestic Finance and Deputy Secretary of the Treasury Frank N. Newman had this to say about the possibility of investors not wanting to use their bank deposits to buy U.S. Treasury securities:

    “Treasuries today are much like time deposits directly with the U.S. Treasury, but better than similar deposits in commercial banks, since Treasuries are fully backed by the U.S. government, and tradable”

    Frank N. Newman “Freedom From National Debt”, Page 11.

    In his opinion, there’s generally always going to be people who would rather put their money in Treasury securities as they’re backed by the Full Faith and Credit of the United States and the United States has its own Central Bank and controls its own currency whereas banks are riskier.

    Personally, I find that argument persuasive. I think I would rather have my money in a time deposit back by 5,000 nukes than a time deposit backed by $250k of deposit insurance.

    So maybe he’s right. What scenario is going to take place where all people would rather have bank money than U.S. Treasury Securities and the Treasury is unable to sell bonds???

    Just my two cents.

  191. Gravatar of Cory Cory
    6. March 2014 at 07:55

    Mark, Scott or anybody else,

    Off-topic I suppose but since others led us on this path I think it’s an ok question.

    I’m sure you think that the Federal Reserve already would have plenty of tools to tighten monetary policy in the face of profligate congressional deficits.

    But, suppose a member of Congress were to propose a bill that would allow the Federal Reserve to issue its own various types of securities, say, U.S. Federal Reserve Securities, as another tool (say a FED NGDP indexed security even???) to tighten monetary policy in the face of deficits. Would you think that would be a worthwhile idea?

    So, imagine some scenario in the future where maybe the FED does not have so many U.S. Treasuries on its balance sheet and where Congress repeats the LBJ years and increases military spending and social spending without raising taxes and the economy is already at or near full employment, the Federal Reserve could issue its own securities in the face of such fiscal profligacy and use those to tighten monetary policy.

    I am not an expert but it seems to me that this sort of thing would be a good backstop against Congressional failures to control its budgets.

    At the same time, I worry that if Congressmen were to really grasp the power of the Central Bank to offset its profligacy, that they might start shedding budget discipline altogether. And, I think that is something our Austrian friends might justifiably be worried about.

  192. Gravatar of Matt McOsker Matt McOsker
    6. March 2014 at 08:16

    Cory not sure I understand. The Fed can simply increase or decrease their purchases of Treasuries to manage policy. If debt issuance increased they can simply increase QE operations. Are you asking what they do if there were no issuance of treasuries?

    On a separate note we have been deficit spending for decades, as has Japan without many problems.

  193. Gravatar of Cory Cory
    6. March 2014 at 08:46

    Matt,

    I guess I’m asking, would it be a good idea to allow the FED to issue its own Treasury-like securities in the very, very, very unlikely event that the FED would not have Treasury Securities on its balance sheet to sell to the public or would be unable to find buyers for Treasury Securities in order to tighten monetary policy in the face of Budget Deficits that might cause inflationary pressures?

    I mean remember, there was a time in the early 2000′s when Greenspan and co. were talking about the prospect of budget surpluses eliminating Treasury securities and the FED having to accumulate private assets.

    I agree that we have been deficit spending for decades without inflation. But, as I understand it, it is a reasonably common view that one particular instance of demand-pull inflation generated by deficits might have been during the Johnson administration when unemployment was at about 4% and yet we increased military spending for Vietnam and began the War on Poverty. Inflation started to rise and the FED did not properly offset it.

    Surely, if we agree with the tenets of Market Monetarism, the FED could have offset that inflationary pressure by selling securities.

    But, as this comment thread indicates, there is always persistent fear from our Austrian friends and others that the Public will not want U.S. Treasury Securities for some reason or another. Or, there might be some possible, hypothetical world where the FED doesn’t have any to sell(very unlikely I agree).

    I think it would be another arrow in the quiver if we might be able to say in response to these fears, “Yeah, well, if that happens check it out, the FED can design its own securities to sell to the Public in that extremely unlikely event. Stop worrying about Budget Deficits causing inflation! The FED can stop it if they do their job!”

  194. Gravatar of Chuck E Chuck E
    6. March 2014 at 08:49

    Major,

    Doesn’t the supply of money need to grow in order to accommodate the growth in Population, and the increase in the wealth of a nation due to commodities & manufacturing (ie: creating something from nothing)? I don’t see how that would occur in a non-fiat money regime.

  195. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 08:53

    @Mark, Don, thanks for your explanations! Can you explain this Sumner quote then:

    “Regarding the “extreme socialists,” I like to sometimes tease conservatives who want really low inflation by pointing out that that they are advocating socialism.”

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/01/monetary-policy-fiscal-policy-the-target-and-the-size-of-the-central-bank.html?cid=6a00d83451688169e201a3fc03a88a970b#comment-6a00d83451688169e201a3fc03a88a970b

    Rowe says something similar in the post.

    @Vincent, sure, hyperinflation is not fun for the little guy. But I often see your comment (the one I responded to) as one presented about how inflation in general hurts the “little guy.” Inflation at expected levels should be neutral…. unless you don’t have an income and you’re living off a pile of physical cash.

  196. Gravatar of Vincent Cate Vincent Cate
    6. March 2014 at 09:03

    “I guess I’m asking, would it be a good idea to allow the FED to issue its own Treasury-like securities [...]”

    The Fed paying interest on “excess reserves” is much like selling a 1 day bond that rolls over by default. It really competes with short term government debt and has the same impact as far as the economy, inflation, and hyperinflation.

  197. Gravatar of Vincent Cate Vincent Cate
    6. March 2014 at 09:06

    “Inflation at expected levels should be neutral…. unless you don’t have an income and you’re living off a pile of physical cash.”

    Inflation at hyperinflation levels is not neutral. Don’t think anyone has studied hyperinflation and thought the results were neutral. Incomes don’t keep up with hyperinflation. For anyone who needs their income to get by (most people) the effect of hyperinflation is very negative.

  198. Gravatar of Vincent Cate Vincent Cate
    6. March 2014 at 09:09

    “My question is, what evidence is there that it is even remotely likely that we’re going to find a scenario where people would not want to buy treasuries?”

    History. In all the previous hyperinflation cases the only buyer of government debt was the central bank. You may think, “this time is different”. There was a book by that title where every time people think this time is different, but each time printing too much money makes the value drop fast.

  199. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 09:31

    Cory,
    “But, suppose a member of Congress were to propose a bill that would allow the Federal Reserve to issue its own various types of securities, say, U.S. Federal Reserve Securities, as another tool (say a FED NGDP indexed security even???) to tighten monetary policy in the face of deficits.”

    You’re basically proposing that Congress grant the Fed the authority to issue securities. Given Congress has been so reluctant to raise the ceiling on the amount of securities that the Treasury is permitted issue, I rather doubt they will ever grant the Fed unchecked ability to issue securities.

  200. Gravatar of Don Geddis Don Geddis
    6. March 2014 at 09:32

    @Mark A. Sadowski: Awesome historical info about the origins of the 2% inflation target! I did not know that. Thanks!

    @Tom Brown: I hesitate to speak for Sumner, but I believe his teasing joke goes like this: conservatives like capitalism, and say they want “a strong dollar” and “low inflation”. And maybe a gold standard, with 0% inflation. But that leads to crashing an economy, severe recessions, and massive unemployment. And then the citizens revolt (or elect new politicians), and in response to the economic pain, they swing the pendulum to the other side, and demand a massively increased social safety net, aka socialism. (E.g.: Great Depression -> FDR -> New Deal)

    So Sumner’s joke is: the conservative desire for both a free market, and also 0% inflation, is politically contradictory. The more you fight for one, the less successful you’ll eventually be with the other.

  201. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 09:37

    Tom Brown,
    “Can you explain this Sumner quote then:…”

    It’s spelled out clear as day in Nick’s post:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/01/monetary-policy-fiscal-policy-the-target-and-the-size-of-the-central-bank.html

    “…”How big do we want the central bank to be?”

    The size of the central bank will depend on the monetary policy target. If the central bank targets 100% inflation (or 103% NGDP level growth) the central bank’s balance sheet would be very small (relative to GDP). That’s because currency would pay minus 100% real interest per year, so the demand for currency would be very small relative to GDP. Fluctuations in the demand for currency would need to be accommodated by the central bank, so the size of the central bank would need to fluctuate to keep inflation on target, but the average size of the central bank would be very small, and the absolute size of those fluctuations in size would be very small too.

    As we lower the inflation target (or NGDP level growth target), the demand for the central bank’s currency would increase, the average size of the central bank would increase, relative to GDP, and so would the absolute size of those fluctuations in size.

    How low do you want the inflation target to go? How big do you want the central bank to be? How big do you want the fluctuations in size of the central bank to be?

    Do you want a central bank that sometimes needs to own all the government bonds, all the commercial bonds, all the shares, all the farmland, all the houses…to keep inflation (or NGDP) on target?

    You probably don’t. (Unless you are some sort of extreme socialist who wants the government-owned central bank to own everything.)…”

  202. Gravatar of Matt McOsker Matt McOsker
    6. March 2014 at 09:51

    Cory, the Fed could buy other non treasury debt, use IOR, IOER, reverse repurchase agreements, and term deposit facilities. I don’t think the latter two have been used much recently – I think.

    http://www.newyorkfed.org/research/staff_reports/sr642.pdf

  203. Gravatar of Matt McOsker Matt McOsker
    6. March 2014 at 09:59

    Cory, part of my post dropped. As MArk points out politics is always at play. For example, I believe the ability for the Fed to pay IOER was granted under the The Financial Services Regulatory Relief Act of 2006.

  204. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 10:31

    Mark, first of all I agree with Don, that was some interesting historical info about 2%.

    Second, you just reminded me that I didn’t understand Nick’s post completely in the 1st place. :(

    From you I learned that GDP = NGDP unless spelled out otherwise, but in Nick’s post he refers to both GDP and NGDP as if they are different things. Does he mean GDP = NGDP?

    OK, after re-reading it again, I think I absorbed a little more, but my question above remains. What does he mean by GDP?

  205. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 10:42

    Vincent, if 100% a year inflation had been the case for decades, and inflation were actively targeted at that rate so everyone expected it, I don’t think it would make a lot of difference. It says nothing about real incomes or prices. Everyone would automatically factor a 100% inflation rate into all nominal variables. Cash would become very unpopular. Bank deposits would probably pay 98%. People would get huge raises as a baseline, and perhaps several times a year, and expect them too. That’s about it.

    Hyperinflation is devastating because it’s shooting past expectations all the time.

    You should read that Nick Rowe post that I’m discussing with Mark and Don right now… it kind of ties into this conversation:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/01/monetary-policy-fiscal-policy-the-target-and-the-size-of-the-central-bank.html

  206. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 10:48

    … if we are to believe Nick, then it all comes down to how big you want the central bank to be. You want a tiny one? 100% inflation should appeal to you. Are you an extreme socialist that wants a huge central bank? Then close to 0% is probably what you’re looking for.

  207. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 10:49

    Tom Brown,
    “What does he mean by GDP?”

    He means NGDP.

    When he says “demand for currency would be very small relative to GDP” and “the average size of the central bank would increase, relative to GDP” he’s essentially talking about comparing two nominal quantities. Currency in circulation and the Fed’s balance sheet are never measured in real terms and it wouldn’t make any sense to take the ratio of a nominal quantity to a real, would it? So obviously he’s talking about NGDP.

    So why did he go to the trouble to write “NGDP” when he said “[if] the central bank targets 100% inflation (or 103% NGDP level growth” and “[as] we lower the inflation target (or NGDP level growth target)” and “to keep inflation (or NGDP) on target”? Because he’s talking about central bank targets. If he had simply said “GDP” it’s possible some people will interpret that as meaning “RGDP” growth (as you evidently might have) but he wanted to make sure that people understood he was talking about nominal growth.

    If more people understood that it doesn’t make sense to assume GDP means RGDP (GDP adjusted by the GDP implicit price deflator) he wouldn’t have had to go to the trouble of writing NGDP in each of those cases.

  208. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 11:53

    … or if he’d just written “NGDP” every time he meant NGDP it would have been clearer for us rookies…. especially in a case with a 100% inflation target where the numerical difference between NGDP and RGDP is HUGE!

    … but then rookies maybe aren’t his target audience.

    Thanks!

  209. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 12:00

    TravisV notified me in another thread that in my comment at

    6. March 2014 at 05:44

    I linked to the wrong FOMC minutes. The correct link is here:

    http://www.federalreserve.gov/monetarypolicy/files/FOMC19960703meeting.pdf

    Yellen’s remarks are on pages 42-45.

  210. Gravatar of ssumner ssumner
    6. March 2014 at 13:15

    Vince, You asked:

    “Sumner, so you agree that you can get a feedback loop that makes inflation hard to control?”

    Not at all. And I never suggested I did believe that.

    Maurizio, You said;

    “Austrians believe that, if the central bank stabilizes NGDP growth, as Sumner suggests, it will have to print money at an ever increasing rate.”

    I doubt that, as it’s clearly 100% false. Not even debatable.

  211. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 14:13

    Cate: “Sumner, so you agree that you can get a feedback loop that makes inflation hard to control?”

    Sumner:”Not at all. And I never suggested I did believe that.”

    Can you tell me how you explain hyperinflation? In my 30+ explanations most of them have a feedback loop that seems hard to break once it starts.

  212. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 14:42

    I meant to type “do you agree” and not “so you agree”. Did not mean to imply you did believe that. Need to proof read better…

  213. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 16:15

    Tom, if everyone is expecting 2% inflation and you get 2% inflation then the inflation is neutral. But when you have people expecting 2% inflation holding 30 year bonds paying 3% and you then get 26% inflation, which seems to be speeding up, the value of the 30 year bonds will be less than 1% what it was. Other savers may have lost 26% but long term bond holders will lose 99+%. People holding gold and silver do not lose value, as their gold still buys as much in other countries. So the onset of 26% inflation is nothing to gold holders and a 99% hit to long term bond holders. This onset of high inflation is not neutral.

  214. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 16:38

    Vincent, I agree: inflation not matching expectations (whatever those expectations are: 0%, 2% or 100%) will hurt someone. If inflation is higher than expected, creditors are likely to be hurt (your bond holders for example). If inflation is lower than expected, debtors are likely to be hurt (the bond issuers in your example). If inflation doesn’t deviate too far from expectations the damage is minimal, but hyperinflation or hyperdeflation can really do some damage, because they are not typically expected, and in fact are often accelerating (I think!) … with rates continually not matching expectations.

    Marcus Nunes documents a case in Brazil in which high inflation (perhaps bordering on hyperinflation) almost became an expected thing at an expected rate: one of the consequences was pantries got bigger, presumably because people went out to purchase all their food for the month right away after receiving their pay check. That was also a case where hyperinflation was stopped immediately with a clever monetary policy:

    http://thefaintofheart.wordpress.com/2013/08/30/inflation-doesnt-have-a-life-of-its-own-i-e-its-not-inertial/

  215. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 16:46

    … and I’m not saying that if we expect 2% this year and 100% next year that’s neutral. I mean long term expectations: it’s been X% for decades now. Clearly if the CB changes its target from 2% to 100% (or vice versa) with no warning, that’s going to cause some chaos: you have to give people a good 30 year warning for that kind of thing.

  216. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 16:52

    “That was also a case where hyperinflation was stopped immediately with a clever monetary policy:”

    The only way hyperinflation is ever stopped is for the central bank to stop funding a large government deficit. The only way they stop funding a large deficit is if the deficit gets smaller as a percentage, or the government collapses. All the other things, like making a new currency, finding some backing for it, etc do not solve the problem on their own. Getting rid of the deficit solves the problem on its own.

  217. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 17:04

    Vincent, I just skimmed through Marcus’ article again: he doesn’t mention the deficit or the debt from what I can tell. He does mention that it’s all about expectations and policy makers’ choices. I assume he means monetary policy makers’ choices there.

    Does anybody know more about the history of this case in Brazil or other cases of hyperinflation being stopped suddenly? Is Vincent correct?

  218. Gravatar of rob rob
    6. March 2014 at 17:41

    Interest rates can be low because of fed policy, they can also be low because the future looks like a dark place you don’t want to invest in overly much. Consistently very low interest rates over any significant amount of time are really only possible in a world of a consistently low Wicksellian interest rate. Actually expansionary policy would have raised the interest rate by now one way or another, I really can’t understand why this is not obvious.

  219. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 17:54

    They always seem to try price controls first. This can make measures of inflation look better for a bit, but the slelves all go empty and production halts till they give up, and then all the hidden inflation comes and things are worse than ever.

    But what really worked, “Balancing the budget on a cash basis became an explicit objective of the three programs, and Peru and Brazil were relatively successful in sticking with it.”

    page 391 in http://www.nber.org/chapters/c7663.pdf

  220. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 18:14

    “It is argued that, in contrast to the European hyperinflations, the more recent ones were not caused by a sudden, large increase in the budget deficit and seigniorage. Instead, they were the final stage of a long process of high and increasing rates of inflation that lasted for around two decades. For a while it looked as if high inflation could be a stable process. In the end, however, it became clear that hyperinflation was all but unavoidable.”

    From the same paper. It is interesting that they say high inflation is not stable. Your idea of a predictable 100% inflation can probably not be done.

  221. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 18:22

    Vincent, thanks for the reference. I looked through it a bit, and it doesn’t seem to include the final dramatic plunge in inflation (which seems to have stuck) in Marcus’ chart in 1994. The dates in the reference only seem to go up to 1991 or 1992 at the latest. Is it possible that your reference does not document the event that Marcus is referring to? Reading about Brazil in particular through pg. 394, it seems to say that the last two attempts were not very successful, but those appear to have been terminated in 1992, prior to what Marcus is talking about. And your right, it says fiscal policies were pursued to a greater degree, however

    “In addition, the use of old failed poli- cies affected expectations in an adverse way, as they were associated with quick increases in inflation.”

  222. Gravatar of Vince Cate Vince Cate
    6. March 2014 at 18:27

    Along with the usual money creation to fund the government deficit, there was a non trivial amount of money creation by the central bank that was loaned to regular banks and then loaned to bank insiders. These loans at less than the inflation rate were really a kind of corruption.

    Tom, this is an interesting paper. Read it.

  223. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 18:36

    … the “old failed policies” were things like price controls (which Marcus also mentions as failures) but I don’t see where it mentions success with what he was talking about.

    BTW, this Nunes article on the same subject has more details:

    http://thefaintofheart.wordpress.com/2012/10/31/two-kinds-of-money/

    Again, no mention of debt or deficits. Not saying that wasn’t part of it, but it’s strange he didn’t mention it if it was.

  224. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 19:15

    Sumner:

    “Austrians believe that, if the central bank stabilizes NGDP growth, as Sumner suggests, it will have to print money at an ever increasing rate.”

    I doubt that, as it’s clearly 100% false. Not even debatable.

    It’s not clearly 100% false. It’s clearly 100% true.

    That isn’t even debatable.

    E.g. Australia’s M3 rate of growth was accelerating from 1991 to 2008, the period of “stable NGDP.” The growth rate hit almost 25% per year before the RBA reduced the rate of growth and brought about a fall in NGDP.

    Non-market money inflation distorts economic calculation, and in order to sustain the spending that comes out of this increasing distortion, accelerating money is required.

    This is true both theoretically and empirically.

  225. Gravatar of Vince Cate Vince Cate
    7. March 2014 at 02:02

    Tom, many people seem to have a worldview that money creation helps. The reality that money creation to fund a government deficit can be as destructive as hyperinflation is causes too much cognative dissonance for them to accept.

    One of my 30+ explanations was by Krugman. I am very impressed that he was able to make a good explanation of hyperinflation without using “debt” or “deficit”.

  226. Gravatar of Cory Cory
    7. March 2014 at 07:40

    Mark and Matt,

    Thanks for answering. I agree my scenario is very unlikely. It was a hypothetical question.

  227. Gravatar of Maurizio Maurizio
    7. March 2014 at 08:39

    Me: “Austrians believe that, if the central bank stabilizes NGDP growth, as Sumner suggests, it will have to print money at an ever increasing rate.”

    Prof. Sumner: “I doubt that, as it’s clearly 100% false. Not even debatable.”

    Could you please elaborate? Some of your readers are layman and some things may not be obvious to them.

    The idea, to repeat in other words, is that, in presence of a supply shock, the economy needs to restructure itself to account for the new conditions. But, by stabilizing NGDP, you are in effect preventing this restructuring. (Like a bailout, which allows unprofitable situation to persist). But, crucially, to keep alive an unprofitable structure can only become MORE AND MORE costly each year. In other words, you are going to need a series of QEs (or bailouts), each of which is going to be more costly than the previous. And the need for QEs will never end, because the economy will never be able to stand up on its own, because the restructuring has not occurred (it has in fact been prevented by the QEs themselves). This is what Austrians imagine is the only outcome. In other words, they concede NGDP will grow 5% a year, but they argue that RGDP will be constant of even decreasing each year, and inflation will make up for the difference. If this reasoning is flawed, I’d love to hear why.

  228. Gravatar of Daniel Daniel
    7. March 2014 at 09:24

    by stabilizing NGDP, you are in effect preventing this restructuring.

    That’s the flaw right there – the assumption that unless everybody goes bankrupt and unemployed from time to time, things cannot re-arrange themselves.

  229. Gravatar of Daniel Daniel
    7. March 2014 at 09:38

    Also, recessions are caused by a DEMAND shock – so to argue that stabilizing aggregate demand screws up productivity is total nonsense.

    But then again, ipse dixit is the austrian’s favourite method.

  230. Gravatar of Don Geddis Don Geddis
    7. March 2014 at 09:51

    Sumner: this post has an impressive ratio, of # of words in the (very many, very long) comments, to # of words in the (very short) original post. Probably a record for you? Well done!

  231. Gravatar of Maurizio Maurizio
    7. March 2014 at 10:44

    Daniel, I was thinking something similar. If I had to respond to the Austrian critique, I think I would say the following:

    Sure, the economy needs to restructure after a supply shock. But how exactly must it readjust? By decreasing real wages. But, by stabilizing NGDP, we are doing exactly that; we are helping real wages decrease. So NGDP stabilization is not really _preventing_ the restructuring of the economy; it is actually _aiding_ it. It would happen much more slowly and painfully otherwise.

    Do you think this response is in the spirit of MM? I think stated in that way, Austrians would partially accept that.

  232. Gravatar of Scott Sumner Scott Sumner
    7. March 2014 at 11:52

    Thanks Don, Each comment gives me about 1/100 of a cent in ad revenue.

    Maurizio, If money growth kept accelerating you’d have hyperinflation, not steady NGDP growth.

    Your second comment helps explain why NGDP is stabilizing, and why Austrians like Hayek favored NGDP targeting.

  233. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 12:57

    Vincent, you might be interested in this recent exchange between Marcus and I on the topic of Brazil’s hyperinflation in the 1990s and your comment here:

    https://thefaintofheart.wordpress.com/2014/03/06/its-really-a-sing-dance-among-fomc-members/#comment-13158

  234. Gravatar of Maurizio Maurizio
    7. March 2014 at 13:21

    Prof. Sumner, I think you should try to show that NGDP growth stabilization, while helping decrease real wages (which is great), at the same time does _not_ allow to stay in business those companies that _should_ go bankrupt due to the supply shock. (Why should they go bankrupt? because after the supply shock, society as a whole cannot afford to produce their product anymore, or not as much as before). By what mechanism exactly will these companies go bankrupt, under NDGP targeting?

  235. Gravatar of Daniel Daniel
    7. March 2014 at 13:27

    By what mechanism exactly will these companies go bankrupt, under NDGP targeting?

    By the same mechanism that they go bankrupt in “regular times”.

    Except that with NGDP targeting the “regular times” will (hopefully) mean “pretty much all the time”.

  236. Gravatar of Vince Cate Vince Cate
    7. March 2014 at 13:42

    I will attack the issue of predicting the timing for hyperinflation onset.

    http://howfiatdies.blogspot.com/2014/03/scientific-theories-make-testable.html

  237. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 13:48

    Daniel:

    If a whole currency region is infested with malinvestment, there should be market driven spending changes for that region, just like you support such a thing for a subjectively decided fewer number of firms for a period you call “regular times.”

    The market process is ALWAYS in “regular times.” The issue is whether peaceful production and exchange can take place, or if psychos with guns believe they should control all money and spending.

    Thankfully, the public is waking up, slowly, with crypto currencies like Bitcoin. This is society’s white blood cell response to the cancer that is centralized counterfeiting based on coercion.

  238. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 13:56

    Daniel:

    “Also, recessions are caused by a DEMAND shock – so to argue that stabilizing aggregate demand screws up productivity is total nonsense.”

    No, recessions are not caused by demand shocks. They are caused by previous inflation, in which “demand shocks” later on are an effect. Thus, the very inflation you believe is a cure, is actually the disease. People just don’t suddenly stop spending for no reason. There are real reasons they do so.

    You aren’t even considering the cause(s) for why so many people would suddenly increase their money holding times such that spending falls from one period of time to the next. You are oblivipusly taking it as an inexplicable given. That or some form of “animal spirits”, which is just saying “I don’t know” in another way.

    Your theory is flawed.

  239. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 14:02

    Daniel:

    “by stabilizing NGDP, you are in effect preventing this restructuring.”

    “That’s the flaw right there – the assumption that unless everybody goes bankrupt and unemployed from time to time, things cannot re-arrange themselves.”

    That’s a flaw right there – the assumption that continuing profitability will be sufficient to incentivize people in readjusting away from real resource misuse. As if everyone will turn away profits for the sake of some business cycle theory.

    If market driven losses are not incurred, then malinvestments will be exacerbated.

    Things do not “re arrange” themselves. People are the rearrangers, and they can’t do so effectively unless they can observe free market prices.

    Nothing you say on this blog is true.

  240. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 14:07

    Sumner:

    “Maurizio, If money growth kept accelerating you’d have hyperinflation, not steady NGDP growth.”

    But that’s just it. Steady NGDP growth cannot be made permanent for that very reason. You can’t define your way out of the implication and say “Well then that wouldn’t be what I am advocating.”

  241. Gravatar of Daniel Daniel
    7. March 2014 at 14:13

    As usual, Major_Freedom is a total moron.

  242. Gravatar of Daniel Daniel
    7. March 2014 at 14:14

    Vincent Cate is another instance of the typical internet austrian – he has successfully predicted 10 of the last 0 hyper-inflations.

  243. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 14:27

    Daniel, but Vincent at least has made a very specific prediction: 2% inflation per month (or more) in Japan within the next two years. One thing he hasn’t been specific about is how long that has to carry on for:

    Vincent, what if inflation is 2% per month for a week? Are you going to count that? How about for a single month? I’m pretty sure he thinks that once it gets going at that rate the “feedback loop” will kick in and it’ll be stuck high for some time (a year or more?)… but he wasn’t specific. Vincent do you want to add something about the longevity of the 2% or more per month inflation?

  244. Gravatar of Maurizio Maurizio
    7. March 2014 at 14:42

    Me: By what mechanism exactly will these companies go bankrupt, under NDGP targeting?

    Daniel: By the same mechanism that they go bankrupt in “regular times”.

    It seems to me you need to explain why the income of those companies will decrease, even though people’s overall nominal income is unchanged (due to NGDP targeting).

    In other words, if people have the same income as before, why should they spend less than before on those companies’ product (and therefore more than before on other products)?

  245. Gravatar of Michael Byrnes Michael Byrnes
    7. March 2014 at 14:50

    Maurizio wrote:

    “By what mechanism exactly will these companies go bankrupt, under NDGP targeting?”

    NGDP targeting will protect solvent firms from nominal shocks; that is, shocks created by an imbalance in the supply of money and the demand for money.

    It will not protect insolvent firms.

    A severe recession (or depression) is neither a necessary nor sufficient condition for creative destruction.

    It is not necessary because firms fail all the damned time, in good economic times and in bad. We didn’t need a major recession for Google to supplant Alta Vista or for Apple and Samsung to wipe out Blackberry.

    It is also not sufficient – because a recession is actually quite friendly to those poorly run firms that happen to have the right political connections.

    There is that old saying that recessions return money to its “rightful owners”. If you substitute “politically connected” for “rightful” it might be true!

  246. Gravatar of Ben J Ben J
    7. March 2014 at 15:19

    Maurizio,

    Do individual prices go up and down under strict inflation targeting? That is, do individual prices go up and down when the aggregate price level is increasing at a stable rate? Yes, of course. So trivially the same is true for stable rate of growth in aggregate nominal incomes.

  247. Gravatar of Daniel Daniel
    7. March 2014 at 15:38

    Maurizio

    Did it take a recession to replace horses with automobiles ?
    Did it take a recession to replace typewriters with computers ?
    Did it take a recession to replace candles with lightbulbs ?

    It seems to me you’re the one making all sort of weird assumptions and then claiming the onus is on us to disprove them.

  248. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 16:26

    Daniel:

    As usual, you can’t refute what I said and you only have yourself to hate.

  249. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 16:34

    Vincent clarifies: just 1 month of 2%/mo or more inflation is not a victory condition.
    http://howfiatdies.blogspot.com/2014/03/scientific-theories-make-testable.html?showComment=1394238387098#c9069021076204344327

  250. Gravatar of Vince Cate Vince Cate
    7. March 2014 at 16:37

    Tom, on my Japan prediction I mean that a month with 2% monthly inflation will happen before the end of 2015 and it will be the first month in a 12 month period with over 26% inflation and a 3 year period with over 100% total inflation.

  251. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 16:39

    Vincent, great thanks for the clarity.

  252. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 16:45

    Michael Byrnes:

    “It is not necessary because firms fail all the damned time, in good economic times and in bad.”

    That is a non sequitur. It does not follow from the fact that there are individual business failures during some of the time, that it is unneccasry for thete to be many individual firms failing at all other times.

    Recessions are in fact necessary when a large enough portion of the aggregate capital structure is distorted enough due in part to aggregate demand not being free to fluctuate prior according to market forces, that only a lowering of the tide can reveal who are not wearing swimming trunks. If the tide isn’t allowed to fall according to market forces, then those who took off their trunks because the tide didn’t recede prior, will have little to no incentive to put them back on, and, in addition, it will encourage bottomlessness to multiply until almost everyone is bottomless. At that point, the economy will be so distorted that no amount of addional tide can influence anyone else to take off their swim suits.

    Why must it be the case that if the incomes of every company except, say Apple, fell, that Apple’s revenues must rise to at least exactly offset it? Why shouldn’t company revenues be based on consumer preferences fully?

    In a free market, private money production would lead to fluctuating individual firm and aggregate spending. Since the market is the most right according to Sumner, he ca’t argue against what a market in money would generate, without contradicting himself.

  253. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 16:54

    Michael Byrnes:

    “NGDP targeting will protect solvent firms from nominal shocks; that is, shocks created by an imbalance in the supply of money and the demand for money.”

    In other words, NGDP targeting will protect a population of firms from ever having to incur aggregate losses. If half the population of firms experience a reduction in demand, then demand MUST rise for other firms, without any reason other than for the sake of a targeting of total demand. No matter what those other firms are producing and offering for sale. They MUST experience a rise in revenues for the simple fact that other firms experienced a decrease in revenues.

    That makes little sense.

  254. Gravatar of Daniel Daniel
    7. March 2014 at 17:05

    Major_Freedom is full of sh*t as usual – but I do know that I am in favour of more public nudity.

  255. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 17:37

    Daniel:

    You again show you cannot refute what I said, as usual.

  256. Gravatar of Daniel Daniel
    7. March 2014 at 17:42

    You cannot kill that which has no life.
    You cannot refute that which has no meaning.

  257. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 20:36

    Daniel:

    The arguments won’t go away by ignoring them.

    If what I have been saying “has no meaning”, then it makes no sense for you to be claiming I’m wrong. Meaningless statements are neither right nor wrong.

    You’re just saying they’re meaningless because you can’t engage or refute them. You lack the intelligence.

  258. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 20:39

    Daniel:

    I am not surprised you would use killing life as an analogy.

    After all, your philosophy is just that. You’re a sociopath along with Don Geddis.

    I wonder why this blog has so many supporters who are mental defectives? Oh, I know, it’s because the philosophy of this blog is based on violence. Like flies on…

  259. Gravatar of Maurizio Maurizio
    8. March 2014 at 03:00

    Thank you Michael, Ben and Daniel. I still don’t find your answers completely satisfactory. Here is what I would consider a satisfactory answer to my question (please correct me if you think it’s wrong):

    After a supply shock, under NGDP targeting, those firms will go bankrupt because, even though people’s total nominal income is unchanged, people will nonetheless spend less on _their_ product. Why? Because they will need to spend more on other products. Why? Because they need more money to buy the same amount of goods as before. And why will they need more money? Because price inflation will have occurred, due to NGDP targeting.

    That is a possible answer which I would consider satisfactory. But if that is true, it follow that NGDP targeting can only be effective to the extent that it causes inflation! And this in turn implies that RGDP cannnot follow NGDP. (Otherwise there would not be inflation).

  260. Gravatar of Michael Byrnes Michael Byrnes
    8. March 2014 at 05:32

    Maurizio wrote:

    “After a supply shock, under NGDP targeting, those firms will go bankrupt because, even though people’s total nominal income is unchanged, people will nonetheless spend less on _their_ product. Why? Because they will need to spend more on other products. Why? Because they need more money to buy the same amount of goods as before. And why will they need more money? Because price inflation will have occurred, due to NGDP targeting.”

    I would amend your first sentence to “After a negative supply shock…” Also, it doesn’t necessarily mean firsm must go out of business – really they must adjust to the new economic situation. Only those that are unable to adjust would fail.

    Supply shocks are real (not nominal) events. Forget money. If Saudi Arabia runs out of oil tomorrow, then we are all poorer for it (until and unless we adjust). By contrast, we are all richer because of Moore’s law. This is true no matter what kind of monetary system is used. However, a suboptimal monetary system can make things worse by causing nominal shocks.

    Supply shocks – positive or negative – are a key advantage of NDGP targeting compared to inflation or price level targeting.

    Consider the negative supply shock. This leads to lower real growth. Under NGDP targeting, real growth falls, NGDP is stable, so inflation is higher. This is entirely appropriate. For a given level of nominal income, real income is lower. That’s a real effect (not enough oil, say, so the oil that is available must sell at a higher price). Because oil (energy) is so central to our way of life, sustained high oil prices will reduce real wealth in the short term (but will perhaps signal that there is money to be made by finding alternative energy sources in the longer term). But, under an inflation or price level target, the central bank must respond to a supply shock by adding a nominal shock! The supply shock will raise inflation and the central bank will tighten to keep inflation down. But a central bank obviously cannot target one price – in practice, this means the central bank will try to force all prices down, economy-wide, to hit its target. That will cause nominal income to fall and lead to recession.

    Now, what about the opposite situation, a postive supply shock. A positive supply shock means more real wealth. RGDP growth will be higher – under NGDP targeting, inflation will be allowed to fall. The gain in real wealth will mean that prices are allowed to come down. (Economy wide, it is more likely that this would show up as a lower inflation rate). Under inflation targeting, the central bank must respond to a postive supply shock by expansionary monetary policy – in essence, forcing prices UP economy-wide because gains in productivity cause inflation to fall.

    In practice, this may be why central banks use flexible inflation rate targeting rather than a price level target. They try to use discretion to avoid being inappropriately expansionary during a positive real shock or inappropriately contractionary during a negative real shock. A price level tagret would force their hand. However, recent evidence suggest that central banks are not that good at using their discretion.

    Austrian economists argue that central banks follow policy that is too expansionary during booms. NGDPLT would call for less expansionary policy during booms, without relying on central bank discretion to do so.

  261. Gravatar of Maurizio Maurizio
    8. March 2014 at 07:56

    Michael, if you put it that way then I’m totally on board. I just did not expect you (or prof. Sumner) to agree that, if there is a negative supply shock and NGDP is stabilized, then

    1) RGDP will fall.

    2) There will be inflation (to make up for the difference between NGDP and RGDP);

    3) Such inflation, in particular, is what allows the structure of the economy _not_ to be disrupted. Because inflation will cause some firms to go bankrupt, which is exactly what should happen (because the negative shock requires the structure of production to change and adapt).

    That, IMHO, should convince an Austrian that NGDP targeting does not disrupt the structure of the economy; i.e. it is not a massive bailout that keeps the economy in an unsustainable state.

    The only possible objection that I can imagine Austrians would move is that the firms that would go bankrupt in such a scenario are not those that _should_ go bankrupt. (And indeed in some cases this can be right, if the new money goes into the hands of a small set of people, which were to spend it in some weird way.)

  262. Gravatar of Daniel Daniel
    8. March 2014 at 08:22

    Maurizio

    But if that is true, it follow that NGDP targeting can only be effective to the extent that it causes inflation!

    YES ! That is exactly how NGDP targeting is supposed to work. When a supply shock hits, you get less real growth and more price inflation.

    Also – you need to stop thinking about price inflation and replace it with WAGE INFLATION. Since wage stickiness is what causes the business cycle, by stabilizing wages the severity of recessions will greatly decrease.

    Also – who cares what the austrians think ? They’re basically a cult devoted to Mises – who, quite plainly, was a charlatan.

    I mean, he openly says that his theories are not subject to verification or falsification on the ground of experience and facts.

    If that isn’t pseudo-science, I don’t know what is.

  263. Gravatar of Michael Byrnes Michael Byrnes
    8. March 2014 at 08:23

    Hi Maurizio,

    Scott has made much of that argument. Other market monetarists, such as Bill Woolsey, have made the same argument. (Woolsey actually favors a 3% NGDP level target to be consistent with expected long-run RGDP growth of 3% and stable prices (over the long run). In his system, inflation during times of economic weakness would be offset by deflation during booms).

    Obviously, Austrians prefer a monetary system with no central bank. However, I do think there are some who would view a rules-constrained* NGDPLT central bank as preferable to a discretionary flexible inflation targeting central bank.

    * I think they also argue that no central bank would could ever truly be rules-constrained.

  264. Gravatar of Daniel Daniel
    8. March 2014 at 08:31

    Michael,

    Seeing how Richard Fisher is still in the FOMC, I’d say doing away with central banks is not entirely an unreasonable idea.

    I mean, does it seem wise to have the entire economy at the whim of an unrepentant sadist ?

  265. Gravatar of Don Geddis Don Geddis
    8. March 2014 at 14:38

    @Maurizio: “if the new money goes into the hands of a small set of people, which were to spend it in some weird way

    Cantillon effects are a tiny, insignificant part of central bank’s control of the macro economy. If you’re thinking of this as the primary monetary transmission mechanism, then you’re missing the big picture. Most of the effect is expectations about the future path of NGDP; some of it is about economic behavior changing as soon as the information (not the money itself) about central bank actions is spread. Essentially none of it is about who gets the “new” money “first”. (Note well: Fed OMOs are not a gift of new funds to a few lucky lottery winners; instead, they are a normal purchase of financial assets, at market rates.)

  266. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 16:10

    Maurizio, re: Cantillon effects: If you search for that term on Sumner’s site, you will find LONG debates about it involving Sumner, Rowe, Glasner, and a bunch of Austrians, notably Greg Ransom and Bob Murphy. I tried to digest it one weekend, but there was just too much to read. A similar story for the MOE vs MOA debates. It’ll make your head hurt. :(

  267. Gravatar of Major_Freedom Major_Freedom
    9. March 2014 at 09:15

    Daniel:

    It is not wage stickiness that causes recessions either. Even if wages were not sticky, it would still take time to reassess, and re-allocate, resources and labor during a period of significant error exposures. Those errors are not caused by wage stickiness.

    Regarding Mises, it is not an argument against anything he says to merely quote him and then effectively say “Can you believe this guy?”

    Oh, and you need to look up the word “charlatan.” It does not mean what think it means.

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